China said to plan asking US on timing of Federal Reserve rate hike

[BEIJING] Chinese officials plan to ask their American counterparts in annual talks next month about the chance of a Federal Reserve interest-rate increase in June, according to people familiar with the matter.

The Chinese delegation will try to deduce whether a June or a July rate rise is more likely, as their nation's policy makers prepare for the potential impact on financial markets and the yuan, the people said, asking not to be named as the discussions were private. In China's view, if the Fed does lift borrowing costs, a July move would be preferable, the people said.

China's exchange rate has already been weakening as expectations rise for the US central bank to boost its benchmark rate for the first time since it ended its near-zero policy in December with a quarter percentage point increase.

It's not unusual for senior officials to press each other on their policies, and any inquiries by the Chinese about the Fed would follow repeated expressions of concern from the US about China's intentions with its exchange rate. The Treasury Department put China on a new currency watch list last month to monitor for unfair trade advantages.

The yuan has dropped about 1.2 per cent this month, joining emerging market peers from India to Brazil and Malaysia in depreciating versus the US currency.

On Wednesday, the yuan traded near a three-month low after China's central bank set the weakest reference rate in five years.

BEIJING MEETING

The annual US-China Strategic and Economic dialog talks are scheduled for June 6-7 in Beijing, little more than a week ahead of the Fed's next policy meeting. Interest-rate futures currently show about a 34 per cent chance of a boost on June 15, from the Fed's current target range of 0.25 per cent to 0.5 per cent for the federal funds rate.

While the US delegation is led by the secretaries of the Treasury and State departments, the chair of the Fed has typically attended the gatherings.

Chair Janet Yellen has participated in both of the meetings since taking the US central bank's helm in 2014.

Fed policy makers have increasingly in recent years highlighted the role of international ramifications of their policy decisions - something directly addressed in the past three years of joint "fact sheet" statements from the US-China talks.

"The Federal Reserve is sensitive to the effects of its polices on the international financial system. A key goal of the Federal Reserve is to maintain financial stability both domestically and internationally," the fact sheets said, as posted on the US Treasury's website.

FED PARTICIPATION

The People's Bank of China didn't immediately respond to a faxed request for comment. The US embassy in Beijing didn't have an immediate comment on whether the Fed will participate in the Beijing talks.

China's indications of concern about coming Fed policy moves follow a period of relative stability for the country's markets.

A surprise devaluation in the yuan last August helped send both Chinese and global stock markets tumbling. Ms Yellen in September indicated that China worries played a role in delaying a Fed rate hike.

Volatility jumped again in January, when the yuan weakened amid what was perceived to be a lack of clear communication from China on its intentions. Repeated assurances that Chinese policy makers were committed to a stable currency helped to quell concerns by February.

China was also helped by a slide in the dollar as expectations for an earlier Fed rate increase diminished.

DYNAMIC CHANGING

The Fed narrative is now changing, with officials signaling that their June meeting is in play. New York Fed President William Dudley said earlier this month that the policy-setting committee is moving closer to raising rates at one of its next two meetings and that the fact this message was getting through to financial markets was welcome news.

"The Fed's inaction has given China a short break," Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets, wrote in a note this week. "Yet, the fundamental picture hasn't changed. Global investors seem increasingly concerned about the level of indebtedness in China and skeptical about its ability to handle a range of problems."

BLOOMBERG