Fed's focus on China unnerves few investors

 The US Federal Reserve’s decision to delay raising interest rates, pending a clearer picture on the performance of emerging economies, has dismayed investors who believe the US rate cycle and global markets are now hostage to Chinese fortunes.

Fed Chair Janet Yellen’s comments that US rates were kept on hold on Thursday partly over concerns that China’s slowdown may be more abrupt than expected prompted some investors to fret that the Fed was becoming too reactive, and focusing on China would prolong market uncertainty.

The thought of having to monitor China’s notoriously opaque policy-making process to get a better reading of Fed policy and global liquidity has left investors flustered and dismayed.

“It’s not clear what to watch,” said Richard Jerram, chief Asian economist at Bank of Singapore.

“Say, if the next China PMI is not that bad, is that reason for the Fed to go in December?” he asked, referring to the widely followed purchasing managers’ index indicator of global demand.

“I don’t know what the basis for their (Fed’s) decision is anymore because they seem to have abandoned rigour. They seem to have become much more subjective, much more reactive, when policy is meant to be forward-looking,” Jerram added. While others said the Fed was merely buying time, waiting for improvement in domestic prices even while the US labor market strengthens, analysts at Citi said the September meeting was a “bunker buster”, and the Fed’s new reaction function to global market developments will take time to comprehend.

Most frustration lies in the way policy is decided and communicated in China, the world’s second largest economy — from the secretive, centralised policy-making process and doubts over how far to trust official data to the ruling Communist Party’s heavy-handed market intervention.

The People’s Bank of China (PBOC) doesn’t even say when and how often it reviews rates.

“People are concerned because in developed economies, generally, government intervention is very scary,” said Zhou Hao, economist at Commerzbank in Singapore.

Fed Reserve holds interest rates

The US Federal Reserve kept interest rates unchanged on Thursday in a bow to worries about the global economy, financial market volatility and sluggish inflation at home, but left open the possibility of a modest policy tightening later this year. In what amounted to a tactical retreat, Fed Chair Janet Yellen said developments in a tightly linked global economy had in effect forced the US central bank’s hand.