The Impact of the Latest Federal Reserve Interest Rate Hike on the Chinese Economy

Abstract

This study utilizes weekly data from March 2022 to September 2023, employing the TVP-VAR model to empirically analyze the impact of the Federal Reserve's interest rate hikes on the Chinese economy. The results indicate that the Federal Reserve's rate hikes have exerted negative shocks on China's output, with the effects dissipating after 8 to 12 lags. China's monetary policy has shown a short-term inverse relationship with that of the United States, though the overall impact remains minimal. The rate hikes have suppressed China's fixed asset investments, with a gradually diminishing impact on GDP. Additionally, the rate hikes have negatively affected the RMB exchange rate and China's exports, with the rising USD/RMB exchange rate further restraining exports. The widening interest rate differential between the USD and RMB has impacted China's stock market, making international capital more inclined to invest in U.S. enterprises. To address these challenges, this paper recommends that China continue to implement a prudent monetary policy, advance RMB internationalization and exchange rate marketization reforms, enhance market liquidity, and improve the stock market and institutional frameworks to bolster economic stability and resilience. The findings provide theoretical foundations and feasible strategies for sustaining China's economic growth and mitigating external shocks.