The US taper decision won't destabilize the Chinese economy
- By Lan Xinzhen
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E-mail Beijing Review, January 22, 2014
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Residents buy vegetables at a supermarket in Hefei, capital of Anhui Province, on December 23, 2013 [By Du Yu] |
Starting from January 2014, the U.S. Federal Reserve (Fed) cut its monthly asset buying from $85 billion to $75 billion. To elaborate, the purchase of long-term government bonds has been scaled back from $45 billion to $40 billion and purchasing of mortgage-backed securities has been cut back from $40 billion to $35 billion. The Fed's new move signaled a gradual withdrawal from the unconventional quantitative easing (QE) program, which was launched to support U.S. growth after the global crisis in 2008. The QE program aimed to bring down interest rates and encourage investment by buying billions in bonds and other securities. Monetary policy in the world's largest economy will now be tuned back to conventional policies.
China received large capital inflows because of the QE program, resulting in a higher inflation rate. The country's central bank had to raise interest rates and increase the reserve requirement ratio to curb inflationary pressure. Now, experts are highly concerned whether or not the end of QE will worsen China's liquidity conditions and destabilize the country's economic growth.
He Liping, a professor of finance at Beijing Normal University, said China upholds a prudent monetary policy in general. He suggested that preventing the U.S. QE exit strategy from destabilizing China's financial markets or macro-economy should be a key goal of China's monetary policies in 2014.
Limited impact
Since December 2013, China's stock market has witnessed a continuous drop. Analysts suggested this is related to the Fed's decision to trim its bond-buying program, as a great amount of "hot money"—speculative capital flows between countries in order to earn a short-term profit—fled from China's stock market, leaving behind a pessimistic atmosphere in the market.
He said the pessimism is completely unnecessary. "The U.S. exit strategy will exert a certain impact on China, but won't deal a heavy blow to the Chinese economy, because the United States has a clear logic and timeline in tapering QE."
