RMB Will Become One Of The Most Stable Currencies In The World.

The US Federal Reserve has announced that it will raise the target range of the federal funds rate by 25 basis points to 0.5% to 0.75%, and release the policy signal that the pace of raising interest rates may be accelerated next year.

In view of the significant external impact of the Fed's policy signals and pacing rhythm, the US monetary authorities must give full consideration to the negative spillover effects of their policies and strengthen macroeconomic policy coordination with other major economies in the world against the backdrop of instability in the world economy.

As the world's largest economy and the main issuer of the reserve currency, GDP accounts for nearly 1/4 of the world's total and 60% to 80% of international trade is settled in US dollars.

Over the past few decades, the United States has enjoyed long-term economic stability and prosperity thanks to its dominance and dominance in the global banknote printing machine.

First, the Fed has a communication responsibility to stabilize global market expectations.

For the global financial market and trade, the accelerated pace of the Fed's interest rate increase will mean that the monetary policy of the Federal Reserve and the European Central Bank and the Bank of Japan will be further differentiated. The spread of spreads will drive the US dollar to rise to the main currencies such as the euro and the yen. The US dollar index will continue to strengthen and the investment Arbitrage Behavior in the financial market will intensify.

Because exchange rate is closely related to trade, the dispute between exchange rate and trade will become more intense.

Second, the Fed should balance domestic and international interests and reduce negative external spillovers.

The Fed's increase in interest rates will have a spillover effect on emerging economies.

As the dollar denominated assets have better prospects for return, the Fed's increase in interest rates will attract investors to shift money from emerging economies to the United States, leading to devaluation of emerging economies and pressure on the asset markets of emerging economies.

Guo Shengxiang, President of the Australian innovation finance research institute, believes that every time the US dollar flows back to the United States, it will bring turbulence to the global financial market, and the world economy, especially the emerging economies, will be hit.

In the 90s of last century, for example, the bubble of the new Internet industry expanded, and the Federal Reserve tightened monetary policy, resulting in a shortage of US dollar and financial turmoil in Southeast Asian countries, which led to the outbreak of the Asian financial crisis in 1997.

Thirdly, the Fed should pmit positive energy to the future of world economic recovery.

As the most influential central bank in the world, the adjustment of monetary policy of the Federal Reserve will inevitably have an important impact on global financial markets and capital flows.

The withdrawal of large US dollars from emerging market countries will lead to these countries.

It will aggravate its domestic inflationary pressure.

For some economies, or will have to tighten monetary policy to follow the US interest rate to stabilize exchange rate and control inflation, but the huge increase in financing costs will aggravate the debt burden of these economies and drag down economic growth.

If the Fed raises interest rates too fast, some countries with poor economic conditions, over reliance on external financing and weak solvency will add to the risks of financial crisis and economic recession, which in turn will be pmitted to the United States through trade and financial channels and jeopardize the economic recovery and financial stability of the United States.

At the summit of the group of twenty in Hangzhou this year, the leaders of the meeting clearly pointed out that the major economies of the world should reduce the uncertainty of macroeconomic policies, increase pparency and minimize negative spillovers to other countries.

The United States has long benefited from the dominant position of the US dollar, changing resources in US dollars, changing products in dollars, and changing services in dollars. The United States is buying goods from other countries with the US dollar, but also through the currency devaluation and overdraft consumption, it has eaten the grain and exported its financial risks to the whole world.

Therefore, the United States Federal Reserve carefully grasps the pace of interest rate increase and strengthens policy communication with other economies and financial markets, which is in line with the common interests of the US economy and the global economy.

Fed policy to the world economy: multiple risks

The Fed's interest rate hike at the end of the year is hidden behind complex policy contradictions. It also has multiple spillover effects on the US and the world economy, and a cloud over the global economy next year.

The Fed decided to raise interest rates by 25 basis points after 14 years, and expects to raise interest rates by 3 times next year.

For the global market, this decision is not unexpected. The Fed's explanation of interest rate increases is also full of confidence: This is a reasonable decision based on the fundamentals of the US economy.

Admittedly, the US economy is recovering steadily, fully employed, and inflation is heating up. At the same time, the financial market is advancing all the way, and the Fed's interest rate increase is imperative.

But this measure, which seems quite reasonable to the Fed, may not bring about reasonable spillover effects on the US economy and even the world economy.

First of all, for the US economy, the Federal Reserve's monetary policy and Trump economics have produced incompatible contradictions.

The Fed's interest rate increase, especially if the rate hike is accelerated next year, is bound to push the US dollar up. At present, the US dollar is at a 14 year high.

The appreciation of the US dollar will widen the US trade deficit and shrink the overseas profits of us enterprises, which will lead to the import commodities becoming more expensive, thus pushing up the living cost of the working class.

This runs counter to the election pledge of President elect Trump to reduce trade deficit and improve the situation of blue collar workers.

At the same time, Trump advocated increasing fiscal spending and speeding up infrastructure construction, which will increase the risk of overheating in the US economy, which may accelerate the pace of interest rate hikes by the Federal Reserve, which will further push up the US dollar and exacerbate the imbalances in the US economy.

Pedersen, senior researcher at the Institute of international economics, William Klein, predicts that the US current account deficit will expand from 2.7% this year to nearly 4% of GDP in 2021.

Second, the Fed's interest rate increases and the US dollar's strength have increased the risk of trade war.

This is because the Fed's higher interest rate and stronger US dollar will lead to the expansion of the US trade deficit, which may lead the next US government to resort to protectionist measures to win the interests of US exporters.

In addition, the strong dollar will hamper Trump's desire to return to the us to attract manufacturing jobs, because a strong dollar means that the cost of production in the US is even higher.

Britain quoted a senior European trade official as saying: "the appreciation of the dollar may be the beginning of a trade war."

Global trade growth has slowed for 5 consecutive years, and Reuters's survey of hundreds of professionals around the world shows that the global trade slowdown may worsen in the future.

Against this background, a trade war between major economies will bring a heavy blow to the global economy.

Once again, the Fed's interest rate increase will trigger continued outflow of capital in emerging markets, especially in countries with poor economic conditions, over reliance on external financing and weak solvency.

Guo Shengxiang, President of the Australian innovation finance research institute, said that historically, every time the US dollar went back to the United States, the damage to the world economy was great.

Cheng Yulin, head of the China business unit of the market department of Marubeni Corporation, said that raising interest rates has triggered investment funds and foreign exchange fleeing from developing countries and emerging market countries, which will increase the interest rates of national loans and loans of these countries and reduce their ability to repay their debts, which may cause financial, foreign exchange markets and political turmoil.

Finally, the Fed's interest rate increase also highlights the global monetary policy being out of step and increasing the difficulty of policy coordination among countries.

After the Federal Reserve announced the increase in interest rates, the Central Bank of the United Kingdom, Switzerland, Norway, South Korea and Indonesia indicated that interest rates remained unchanged.

Reuters reported that the Fed tightened monetary policy and most countries

The Central Bank of the European Central Bank and India, Brazil and other central banks are expected to further relax monetary policy.

For the global economy in the 2017, the US monetary policy has become a major external risk.

Moreover, since the outbreak of the international financial crisis in 2008, whether the United States cuts interest rates, implemented quantitative easing policies or increased interest rates, the US monetary policy has always had a cyclical impact on other economies around the world.

How to deal with this external risk and how to make use of domestic regulatory measures to avoid disadvantages has become a test for global policymakers.

In recent years, major economies in Latin America have encountered varying degrees of difficulty.

According to the United Nations ECLAC forecast, the Latin American economy will shrink by 1.1% in 2016, the first two consecutive years of negative growth for more than 30 years, and 2017 is expected to shake off the recession and achieve a 1.3% growth.

However, whether the Latin American economy can recover on schedule is now a question mark.

The Fed raised interest rates again after 14 years and passed a signal that might raise interest rates next year. It may bring external financing difficulties and cost increase to the Latin American economy.

First, the Fed's interest rate increase will cause Latin American countries to outflow capital and increase the risk of debt.

After the Fed raised interest rates, the attractiveness of US dollar assets increased, and the global profit seeking capital would return to the US.

This will cause greater impact on some Latin American countries with high dependence on international hot money and increase their external debt repayment pressure.

In the 80s of last century, the US monetary policy suddenly tightened after years of easing. It led to a ten year debt crisis in Latin America, which spread widely and became Latin America's "lost ten years".

Second, the Fed's interest rate hike will increase the cost of borrowing in Latin America and impede the implementation of the stimulus package.

To cope with the economic downturn, Latin American countries such as Brazil, Mexico and Argentina have announced a series of economic stimulus policies such as expanding infrastructure and energy projects, which require a large amount of external capital.

The central bank's passive interest rate increases and the depreciation of Latin American currencies triggered by the Fed's interest rate increase have raised the cost of capital borrowing to a certain extent.

Vargas, a finance professor at the Brazil foundation of Brazil, pointed out that since the Fed raised interest rates, the currency of Brazil has depreciated by more than 5%, and its value has depreciated by 7% at the highest level.

This has caused a lot of pressure on Brazil's economy, slowing down the pace of Brazil's central bank's interest rate cut to stimulate economic growth.

Thirdly, the Fed's interest rate increase will affect the export earning capacity of some Latin American countries, which are mainly exported to primary products.

The recent rebound in commodity prices in the international market is undoubtedly a major positive for Latin American countries such as Brazil, Chile and Peru, which rely on commodity exports.

However, as the Federal Reserve raises interest rates and the US dollar goes strong, international commodity prices will again be under pressure, resulting in the weakening of these countries' ability to earn foreign exchange and thus facing the risk of imbalances in international payments.

Digestion time will be shortened and exposure will increase.

The Federal Reserve raised interest rates from last year for a year, which gave Latin American countries enough response time.

The Central Bank of Mexico raised interest rates by 50 basis points in February, June, September and November respectively, in advance to reserve space for the US Federal Reserve to raise interest rates at any time.

However, once the Fed's interest rate increases, the Central Bank of Latin America will have a bigger test.

However, when looking at risks, there is no need to be too pessimistic about the prospects of the Latin American economy.

Compared with the debt crisis in the 80s of last century and the frequent financial crisis and currency crisis in early twenty-first Century, most Latin American countries have greatly increased their ability to resist external financial risks.

Roberto Dumas, an economics professor at Brazil's St Paul business school, pointed out that with the further opening up of China's economy and the further promotion of RMB internationalization, it is foreseeable that the renminbi will become one of the most stable currencies in the world and play a more important role in the world.

On the one hand, the commodity super cycle, which has been accumulated for ten years, has accumulated abundant foreign exchange reserves for many Latin American countries, and its ability to actively intervene in the foreign exchange market has been significantly enhanced.

On the other hand, Latin American countries have implemented more stringent inflation targeting management, a more flexible exchange rate regime and a more prudent fiscal policy, enhancing their ability to deal with external risks.

It is worth mentioning that deepening financial cooperation between China and Latin America helps Latin American countries find alternative currencies outside the US dollar, thereby reducing financing costs and avoiding exchange risks.

Today, the people's Bank of China has signed a currency swap agreement with 4 Latin American countries, including Brazil, Argentina, Suriname and Chile, and has designated the RMB clearing bank in Argentina and Chile, and has officially launched a global cross-border payment system for RMB.

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