At the end of the FOMC meeting on Wednesday,
economists expect the Federal Reserve to announcethe tapering of its quantitative easing (QE), a stimulative monetary policy that has consisted of monthly purchases of $US85 billion worth of bonds.
The taper will have implications for interest rates and currencies around the world.
So what does the taper mean for China, the world’s second largest economy?
“China will surely be affected by the incoming QE tapering, but we believe the QE tapering will have little material impact on China’s growth, currency valuation and financial stability,” said Bank of America Merrill Lynch’s Ting Lu in a note to clients on September 2.
Lu identified six reasons why he expects China to be “largely immune” to the taper (verbatim):
- Sustained current account surplus;
- Low foreign debt;
- Huge foreign exchange reserves;
- High savings, high investment and high capacity in manufacturing;
- Capital control;
- A large economy with limited dependence on exports;
- A government which does not need to ramp up subsidies to maintain its ruling.
Unfortunately, these are characteristics that aren’t shared by much of the emerging Asian economies to which China is exposed.
“With the rising uncertainty on emerging markets due to the coming QE tapering, the Chinese government will most likely put a special emphasis on financial and economic stability,” added Lu. “We expect Beijing to postpone RMB/USD band widening, to ensure the stability of RMB/USD (neither appreciation nor depreciation), to slow the pace of lifting capital control. We expect neither rate cuts nor hikes.”