China set to benefit from US Fed tapering

The US Federal Reserve’s decision to reduce its bond buying has limited impact on China, says Qian Jun, an economist at Shanghai Jiaotong University and a member of the American Finance Association. Overall, the Fed’s decision is good for China.

Qian says the gradual exit of the easy money policy will ease the pressure for China to appreciate its currency - a good thing for the country’s export sector. A stronger dollar will also reduce the risk
of holding US Treasuries, he adds.

Qian says he is not concerned about hot money flowing out of China as the scale of the taper is small. The Fed has announced that from next year it will trim its monthly bond purchases to $75bn from $85bn, and it will also likely keep the benchmark interest rate low. “The taper happens in a slow way. It is very unlikely that a lot of hot money suddenly go out of China.”

Qian says China’s capital control will also help it brace for possible impact. The country emerged relatively unhurt in May when other emerging economies saw their currencies pummeled after the Fed first hinted about tapering.

This time, Asian emerging economies seem better prepared. HSBC says the Fed’s decision doesn’t alter its investment views for 2014, where it will continue to favour risk assets, including emerging market equities and higher yielding bonds.

China set to benefit from US Fed tapering