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Fed’s move to taper no worry to China
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China should not worry over the US Federal Reserve’s long-expected and long-feared decision to gradually cut monetary stimulus because the reduction signals a brighter export outlook and will not damage the country’s cross-border capital flow, economists said yesterday.
China enjoys trade surpluses and the interest rate differential still favors the yuan, so foreign exchange inflows should continue and the yuan will strengthen, Stephen Green, chief China economist with Standard Chartered Bank, said.
The People’s Bank of China “will likely welcome the Fed move since it means normalization of US rates slightly quicker than expected,” Green said. “This will close down the yuan-US dollar rate gap quicker and ease foreign exchange inflow pressures.”
Green made his comment after the US Fed said it will trim its US$85 billion a month in bond purchases by US$10 billion starting in January. Chairman Ben Bernanke said the Fed expects to prolong “similar moderate” cuts in its purchases if economic gains continue.
The US financial sector welcomed the move as it signaled strongly the Fed’s confidence in the US economy, and it eliminated uncertainties hanging over American monetary policies since Bernanke hinted at a possible tapering in May.
Since then the uncertainties have hit emerging markets the hardest as investors withdrew funds as they see a stronger US economy.
Zhu Haibin, chief China economist with J.P. Morgan, said unlike other emerging economies, China is able to hedge such speculation due to its strong trade surplus and robust foreign exchange reserves.
“The most vulnerable economies are those running current account deficits and those relying heavily on foreign capital inflows to fund domestic growth,” Zhu said.
CITIC Securities analyst Chu Jianfang said she is not worried about domestic liquidity as the PBOC has tools to offset a possible shortfall in capital inflow.
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