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Fed rate hike imposes short-term pressure on RMB devaluation

By Gao Yinan (People's Daily Online)    16:41, December 17, 2015
Fed rate hike imposes short-term pressure on RMB devaluation
U.S. Federal Reserve chairwoman Janet Yellen speaks at a press conference in Washington D.C., the United States, Dec. 16, 2015. (Xinhua/Bao Dandan)

The U.S. Federal Reserve decided on Wednesday to raise the benchmark interest rate by 0.25 percentage points, the first interest rate increase since 2006.

Over the past three decades, the Fed has had five definite interest rate hikes. It is generally agreed that a raise of 0.25 percentage points does not usually have a large impact on the economy. But because this is the first interest rate hike in nearly ten years, it indicates a recent strengthening of the U.S. economy.

Zeng Gang, the head of the Institute of Finance & Banking at the Chinese Academy of Social Sciences (CASS), said that the Fed's rate hike would impose short-term pressure on the devaluation of the renminbi. In the medium and long term, China's yuan will continue to appreciate. Therefore, the Fed rate hike will have a neutral impact on the renminbi. In fact, the devaluation of the yuan is positive for China's export-oriented enterprises.

Ding Shuang, chief economist for the Standard Chartered Bank of Greater China, told People's Daily Online that U.S. dollars are becoming a strong currency; thus, in addition to China's yuan, currencies all over the world will face devaluation in the short term. Compared with other currencies, the depreciation of China's yuan against the U.S. dollar is relatively small.

Ding added that the U.S. economy is not as strong as one might imagine. Expansion of the U.S. economy has peaked, and a downturn is therefore likely next event. In this case, the strength of the dollar may very well peak in the first quarter of next year.

In China, for a long time the monetary supply and foreign exchange reserves were closely correlated, said Zeng Gang. But with the reform of monetary policy and exchange rate regime, the yuan will gradually drop its dollar peg and its exchange rate will fluctuate with the market. Zeng said he believes that the after the Fed raising its benchmark rate, the Chinese central bank will continue to lower the deposit-reserve ratio, and this method will become more and more common. 

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Editor:Gao Yinan,Huang Jin)

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