Global monetary tightening tests China’s 2-speed economy

The US Federal Reserve’s decision to raise interest rates by 25 basis points marks a pivotal moment not just for American monetary policy, but for China’s increasingly fractured economy. As borrowing costs rise globally in response to persistent inflation – exacerbated by Middle East conflicts pushing oil prices skyward – China faces an uncomfortable reality: its economic fortunes depend on which sector you examine. As for Hong Kong, major local banks kept their prime rates unchanged, but funding costs such as the benchmark one-month Hibor (Hong Kong interbank offered rate) are already edging higher.

The Fed’s unanimous vote to lift rates to between 3.75 and 4 per cent reflects a determination to restore credibility amid a bond market rout. A pre-emptive approach to curbing inflation is sound. Markets have responded with cautious approval; global central banks concur. The European Central Bank delivered a hawkish outlook last week, the Bank of Japan raised its rate to a 31-year high, and markets anticipate four Bank of England increases over the next year.

For China, these synchronised rate hikes will inflict damage – but unevenly. The artificial intelligence investment boom shows little sign of abating despite higher borrowing costs. America’s AI hyperscalers such as Amazon and Microsoft, locked in fierce competition with Chinese counterparts, are unlikely to curtail data-centre plans over modest increases in debt costs. With these companies reporting surging AI revenues and forecasting even larger returns, a 5 per cent US 10-year Treasury yield would just be a speed bump.