The U.S. Federal Reserve is poised to raise benchmark interest rates as soon as this week, which may bring wide-ranging impacts to China’s own economy and monetary policy.

The Chinese economy has shown signs of slight improvement in recent weeks. October trade data was positive, according to state statistics, with both imports and exports increasing in dollar terms compared to a year ago.

Exports were flat (at 0.1 percent) but up considering recent strengthening of the dollar. Imports surged—up 6.7 percent—on higher inflows of commodities such as oil, copper, and coal.

Deflationary pressures also eased somewhat. China’s producer’s price index (PPI)—a measure of price of factory inputs—rose in November as prices of coal, steel, and crude oil all jumped. Consumer inflation also picked up more than forecast, and should continue to rise given the increase in PPI.

An expected series of U.S. rate hikes—December’s 25 basis points should only be the beginning—will continue to boost the dollar and exacerbate existing capital outflows, which Beijing is trying hard to restrict. And with continued positive inflation figures domestically, People’s Bank of China (PBoC) could be pressured to tighten its own rates policy in the near future.

No End to Capital Outflows

A stronger dollar makes U.S. investments more attractive to the Chinese, considering recent depreciation of the yuan.

This could prompt Chinese investors and companies to continue searching for loopholes around capital controls put in place by Beijing to limit cash outflows. China has already spent a big portion of its foreign exchange reserves to manage a depreciating yuan. Any continued strengthening of the dollar will put even more burden on Beijing to burn through its remaining reserves.

PBoC’s reported foreign exchange reserves dropped $69 billion in November, a decline of 2 percent from October and the biggest monthly slide since January. China’s foreign reserves have largely been declining since August 2015 as the PBoC has sold dollars, and as the dollar’s relatively strength versus basket of other currencies increased.

Along with selling the dollar, Beijing is aggressively cracking down on cash leaving the country from companies and individuals. Consumers already face a $50,000 annual conversion limit. For companies, authorities recently barred foreign acquisitions of $10 billion or more, and instituted a new program where each transfer of greater than $5 million must be reviewed and approved by regulators.

A widening gap between onshore and offshore yuan prices points to further yuan depreciation—and possible outflows—ahead. Hong Kong-traded CNH (offshore) yuan fell 0.84 percent versus the dollar in the last week (ending Dec. 8) while CNY (onshore) dropped 0.41 percent. Analysts generally view the CNH to be an accurate predictor of future dollar to yuan direction as it is not restricted by Chinese regulators.

Tightening Rates and Chinese Corporates

With cash expected to continue to flow out of China, Beijing may have little choice but to tighten its own monetary policy.

If authorities choose to go down this route, corporate loan defaults could accelerate and some companies may find it difficult to service their debts and stay solvent.

To put it in context, China’s total debts stand at over 250 percent of the country’s GDP. Fitch Ratings sounded the alarm last week after it estimated that some 15 to 21 percent of all loans in China’s banking system are non-performing. Those figures have been widely suspected, but regardless it’s a staggering amount compared to official average statistics of less than 2 percent at the nation’s biggest lenders.

After an initial flurry of corporate defaults early this year, few companies have been allowed to falter since. Instead of a massive wave of defaults like some analysts predicted, Beijing avoided such action by turning to more creative measures. Facing a slew of redemptions at maturity this year, state-owned companies employed other avenues to assuage the problem by using debt-to-equity swaps, and if the companies are still viable, issuing new bonds or using shorter-term financing to roll over long-term debt.

Until now, easy credit has made issuing new bonds cheap and easy. China financial data firm Wind Info estimates domestic bond offerings are up 44 percent year-to-date compared to 2015. But outside of the largest issuers, small to medium sized companies are increasing turning to short-term financing such as issuing commercial papers wealth-management products.

But these solutions are the most susceptible to interest rate fluctuations. If Chinese interest rates continue to rise, these strategies will no longer be viable.

The 3-month SHIBOR (Shanghai Interbank Offered Rate) has increased 12 percent in the last 60-day period to 313 basis points. Such increases in short-term interest rates may squeeze corporate financing activities and cause defaults at already cash-strapped companies.