Market Overview

Stakes Have Never Been Higher Headed Into Annual U.S.-China Economic Meeting

Stakes Have Never Been Higher Headed Into Annual U.S.-China Economic Meeting

June 6–7, U.S. and Chinese officials will be sitting down to discuss monetary policy, and the stakes for both nations have never been higher.

Last August’s U.S. market selloff and much of the volatility since has been directly tied to worries about the health of the Chinese economy. But while China has been focused on loosening the link between the yuan and the dollar, the Federal Reserve has strongly hinted at a June interest rate hike, a move, which could trigger more Chinese outflows, according to Bloomberg.

While it’s unlikely that China will be able to change the Federal Reserve’s mind about a rate hike, the two countries have a vested interest in keeping surprise policy decisions to a minimum.

Meeting Expectations

“If the Fed does end up raising rates more than expected that will clearly increase the pressure on China’s FX market,” said Louis Kuijs, head of Asia economics at Oxford Economics.

Related Link: Is A June Rate Hike Good News For U.S. Stocks?

As of the March Fed meeting, the median Fed estimate called for two rate hikes in 2016.

China has already been doing its best to prepare for the seemingly inevitable U.S. tightening. After being depleted by more than half a trillion dollars in 2015, China’s foreign exchange reserves have increased for the past two months. The nation has also allowed the yuan to depreciate against the dollar as of late, potentially softening the immediate impact of the next U.S. rate hike.

So far in 2016, the SPDR S&P 500 ETF Trust (NYSE: SPY) is up 2.9 percent, while the iShares FTSE/Xinhua China 25 Index (ETF) (NYSE: FXI) is down 6.6 percent.

Disclosure: The author holds no position in the stocks mentioned.


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