By\u00a0Ricardo Rivera Ch\u00e9vez December,\u00a021 2015<\/p>\n
Translated from Spanish by Katarina Hall<\/p>\n
rrivera@ufm.edu<\/a><\/p>\n <\/p>\n The Federal Reserve raised interest rates by one quarter of a percentage point last week, the greatest increase in almost a decade. The increase did not take the markets by surprise, as it was already expected to happen following the small crisis in the Chinese stock market. There is fear and anxiety about how increased interest rates could impact the world\u2019s second largest economy. The Fed\u2019s last increase in interest rates, under Ben Bernanke in 2004, occurred when China was still the world\u2019s fifth or sixth largest economy. However, China now has a leading role and is prepared to live up to it.<\/p>\n When the Fed lowers interest rates it creates bubbles in emerging markets, which feed on the reallocation of resources guided by deceptive utility expectations. With the increase of interest rates, time intensive investments and capital become a greater risk because they need longer maturity periods and the utility promises diminish, often times disappearing altogether. China\u2019s situation could become serious because companies that loaned large sums in American dollars will have to face higher payments.<\/p>\n However, the PBC has arranged a stable and systematic devaluation of the yuan, as indicated in UFM Market Trend\u2019s second China report. The report examines how the increase of gold reserves, China\u2019s effort to enter the IMF\u2019s currency basket, and this year\u2019s devaluation were done in anticipation of the Fed\u2019s increase of interest rates.\u00a0 The yuan is probably still being overvalued, and risk is still inherent. Yet if the Chinese authorities had handled the situation carelessly, a crisis would have surely arisen.<\/p>\n There is no doubt the PBC is walking on the edge of the jian.[1]<\/a> On one hand it should maintain its financial openness and transparency, which earned China\u2019s place in the IMF\u2019s currency basket and further allowed it to develop a greater market determination for the value of the renminbi. Yet, at the same time it should avoid the fall of a currency that is overvalued,[2]<\/a> which could unchain an exodus of capital.<\/p>\n <\/p>\n