Market Insider

The US Federal Reserve is pushing China into a messy Catch-22

Yuan depreciation: A headache for Chinese policymakers

An interest rate decision in the United States is causing a dilemma for Beijing.

The U.S. dollar index surged to a near 14-year high after the Fed's rate hike on Wednesday and its surprise forecast for three more increases — instead of the two that were expected previously — to come in 2017.

Higher interest rates in the United States make it tempting for China to raise its own rates, because Beijing doesn't want more money to flee the country into higher-yielding U.S. bonds. That flight also hurts China's currency, the yuan. But Beijing could get its economy into trouble by hiking rates, since its continued economic growth is very heavily driven by borrowing.

"You had this pressure that was already building, and the Fed has basically complicated and added to that with a more hawkish message," said Logan Wright, director, China markets research at Rhodium Group.

China's yuan subsequently fell to its lowest level since 2008, and the country's 10-year bond yield jumped to its highest level in more than a year. Declines in five-year and 10-year Chinese bond futures were reportedly so drastic Thursday that trade was halted due to a market trading limit.