Last month, the US Federal Reserve raised interest rates for the first time in more than three years and signaled that it expects to make seven more rate hikes this year.
While some might have feared that US stock markets would be adversely affected by the news, they had already discounted the rate hikes and the Fed’s assessment was roughly in line with investors’ expectations. Consequently, US stock markets only registered moderate moves following the announcement.
In contrast, apparently fearing the effects of significant capital outflows on China’s stock and foreign exchange markets, the People’s Bank of China has adopted a “cut and wait” strategy on interest rates. This is because experience shows that every time the US enters a period of interest rate hikes, substantial outflow of capital occurs in China.
Global stock markets collapsed after the COVID-19 pandemic was unleashed onto the world in early 2020. To prop up US markets, the Fed lowered the interest rate to nearly zero and enacted quantitative easing measures. This massive injection of capital quickly revitalized US stock markets, but because China’s interest rates were much higher at the time, a large amount of foreign capital poured into China and the country saw record amounts of foreign capital flow into its bond market.
However, the situation today is completely different.
Last year’s debt defaults by Chinese property developer giant China Evergrande Group and other Chinese corporations had already prompted foreign capital to begin leaving China. Now that the Fed has set in motion a pathway for successive interest rate hikes, the interest rate spread between US and Chinese government bonds will narrow significantly, giving foreign funds even less reason to keep their money in China. That is why the Institute of International Finance in a report last month said that there were “unprecedented outflows of foreign capital from China’s bond and stock markets.”
The exodus of foreign capital from China will have a number of ramifications, including deflationary pressure on the yuan and — according to experience — downward pressure on China’s stock market.
When the Fed raised interest rates in 2015, this squeezed the spread between US and Chinese government bonds, with the resulting outflow of foreign capital from China’s bond market triggering a stock rout there.
The question is whether the Chinese central bank could stymie the outflow of capital by raising interest rates. That would be a huge gamble, as raising interest rates would make things even worse for the Chinese economy, which has already lost significant momentum.
The level of Chinese corporate debt, in particular, presents a concern. China’s corporate debt-to-GDP leverage ratio of more than 150 percent is one of the highest in the world and could be the straw that breaks the camel’s back.
Moreover, raising interest rates would not necessarily prevent an exodus of foreign capital, as China’s deteriorating business environment and corporate creditworthiness has already made foreign investors more vigilant.
While Chinese leaders will have identified the trend, they have no idea how to stop the outcome.
However, the most fundamental reason behind the Chinese central bank’s “cut and wait” predicament on interest rates is because it has previously operated with a high degree of leverage. When times are good, operating at high leverage brings huge benefits, but once an economy goes into reverse, central banks can get caught in a leverage trap of exponential decay.
Honda Chen is an associate research fellow at the Taiwan Academy of Banking and Finance.
Translated by Edward Jones
On Sunday, 13 new urgent care centers (UCC) officially began operations across the six special municipalities. The purpose of the centers — which are open from 8am to midnight on Sundays and national holidays — is to reduce congestion in hospital emergency rooms, especially during the nine-day Lunar New Year holiday next year. It remains to be seen how effective these centers would be. For one, it is difficult for people to judge for themselves whether their condition warrants visiting a major hospital or a UCC — long-term public education and health promotions are necessary. Second, many emergency departments acknowledge
US President Donald Trump’s seemingly throwaway “Taiwan is Taiwan” statement has been appearing in headlines all over the media. Although it appears to have been made in passing, the comment nevertheless reveals something about Trump’s views and his understanding of Taiwan’s situation. In line with the Taiwan Relations Act, the US and Taiwan enjoy unofficial, but close economic, cultural and national defense ties. They lack official diplomatic relations, but maintain a partnership based on shared democratic values and strategic alignment. Excluding China, Taiwan maintains a level of diplomatic relations, official or otherwise, with many nations worldwide. It can be said that
Victory in conflict requires mastery of two “balances”: First, the balance of power, and second, the balance of error, or making sure that you do not make the most mistakes, thus helping your enemy’s victory. The Chinese Communist Party (CCP) has made a decisive and potentially fatal error by making an enemy of the Jewish Nation, centered today in the State of Israel but historically one of the great civilizations extending back at least 3,000 years. Mind you, no Israeli leader has ever publicly declared that “China is our enemy,” but on October 28, 2025, self-described Chinese People’s Armed Police (PAP) propaganda
Chinese Nationalist Party (KMT) Chairwoman Cheng Li-wun (鄭麗文) made the astonishing assertion during an interview with Germany’s Deutsche Welle, published on Friday last week, that Russian President Vladimir Putin is not a dictator. She also essentially absolved Putin of blame for initiating the war in Ukraine. Commentators have since listed the reasons that Cheng’s assertion was not only absurd, but bordered on dangerous. Her claim is certainly absurd to the extent that there is no need to discuss the substance of it: It would be far more useful to assess what drove her to make the point and stick so
RSS