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Fed's move adds to economic stability

By Xin Zhiming (China Daily)
Updated: 2008-06-27 09:01

The US Federal Reserve's decision to keep the federal funds rate unchanged will contribute to China's economic stability as it may dampen expectation for faster yuan appreciation and speculative capital inflows and help anchor domestic inflation, economists said.

The Fed announced in its latest policy statement issued Wednesday that the central bank had left the level of interest that banks charged each other unchanged at 2 percent.

Although economists are divided on how long the Fed will stick to the current policy and where the US economy will head, there are signals that the central bank has become more confident in the US economic development, said Zhuang Jian, senior economist with the Asian Development Bank in Beijing. If the US economy stabilizes, China's exports would benefit, he said.

The Fed has staged the most aggressive rate-cutting action in more than two decades to tackle the severe credit crunch and housing slump. The dollar has also become continually weak, which has driven up global oil prices and other major commodities, which in turn has helped push up inflation in the emerging markets importing large amounts of commodities, analysts said.

"The Fed's move signals that the dollar may stop sliding, which will help bring down prices of oil, grain and other commodities," Zhuang said.

A drop in grain prices in the international markets would help dampen the expectation of an increase in grain prices in China. However, analysts said that international prices would not have a direct impact on domestic prices.

The leveling off of oil prices and of commodities will offer more help to China's policymakers battling inflation, which peaked in February at 8.7 percent year-on-year before easing to 7.7 percent in May, Zhuang said.

The Fed's move will also reduce the possibility of China's interest rate hikes, said Hu Shaowei, senior economist with the State Information Center.

If the US raised its federal funds rate, it would be more likely for China to follow suit in curbing inflation.

But as the US rate remains unchanged, if China raised its interest rates, the widened interest differentials between the US and China would lead to more inflows of speculative capital into China, Hu said.

The influx of speculative capital will in turn increase pressure on the yuan's further appreciation, he said.

A recent report by the Chinese Academy of Social Sciences economist Zhang Ming said that according to his research model, "hot money" in the Chinese market could amount to 1.75 trillion yuan, roughly the amount of the country's foreign exchange reserves.