China Said to Plan Asking U.S. on Timing of Fed Rate Hike (3)

(Bloomberg) -- 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 the 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. A People’s Bank of China press officer later denied that China plans to ask about the timing of a Fed rate hike.

China’s exchange rate has already been weakening as expectations rise for the U.S. 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 U.S. 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.

‘Tread Cautiously’

"The Chinese side will argue that the U.S. should tread cautiously as it tightens monetary policy and avoid any surprises," said Mark Williams, chief Asia economist at Capital Economics in London, who participated in U.K.-China meetings when working at Britain’s Treasury. "The Federal Reserve will make its decision solely on what it deems best for the U.S. economy, but it is clear that concerns about China have influenced its thinking about the balance of risks facing the U.S."

The yuan has dropped about 1.2 percent this month, joining emerging market peers from India to Brazil and Malaysia in depreciating versus the U.S. currency. On Wednesday, the yuan traded near a three-month low after China’s central bank set the weakest reference rate in five years.

The annual U.S.-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 percent chance of a boost on June 15, from the Fed’s current target range of 0.25 percent to 0.5 percent for the federal funds rate.

‘Pretty Anxious’

"Chinese officials are pretty anxious about the Fed as a June rate hike -- which is not fully discounted in the market -- may boost the dollar," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "This could pose a threat or make it difficult for the PBOC to keep a stable RMB exchange rate," he said, referring to the renminbi, another term for the yuan. "A less aggressive Fed stance is in China’s interest."

While the U.S. 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 U.S. 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 U.S.-China talks.

Fed’s Pledge

"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 U.S. Treasury’s website.

Consulting on policy decisions would be in keeping with a pledge that both China and the U.S. made as members of the Group of 20. After a Shanghai meeting in February, G-20 finance chiefs pledged to consult closely and "clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty" and minimize spillovers.

The U.S. 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. Yellen in September indicated that China worries played a role in delaying a Fed rate hike. Meantime, China last year ended up spending a record amount of its foreign-exchange reserves to counter capital outflows and a sinking yuan.

Volatile Times

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.

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."

(Updates with PBOC press official saying there are no plans to discuss Fed rate increase timing, in second paragraph.)

--With assistance from Vincent Cignarella and Enda Curran To contact Bloomberg News staff for this story: Steven Yang in Beijing at kyang74@bloomberg.net. To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Richard Frost

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