No heavy blow
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E-mail Beijing Review, January 21, 2014
Cooling inflation
Lian Ping, chief economist with the Bank of Communications, said the QE exit signals a gradual recovery of the world's largest economy, which is bound to reinvigorate economies worldwide, including the Chinese economy.
"Hot money outflow from China triggered by the QE exit may be a blessing in disguise when it comes to the long-term health of the Chinese economy," Lian said.
Hot money outflow can soothe the appreciation pressure on the yuan, thus improving the competitiveness of Chinese exports and offering new growth momentum to the country, Lian said. "Also, the QE exit will ease pressure on the central bank's foreign exchange reserves, mitigate inflationary pressure caused by excessive monetary supply and therefore leave room for the central authorities to carry out macro-control measures."
Professor He claimed the Fed's monetary policy has always prioritized maintaining a stable economic growth trend, and the Fed will continue to do so in the future.
In the past, He elaborated, U.S. monetary policy was extremely loose because the economy was hit hard by the financial crisis and prevailing pessimism. Therefore, unconventional loose monetary policy was implemented to put the economy back on course, lower the unemployment rate and create inflationary expectations in the market. Without this unconventional loose monetary policy, the U.S. economy could have slipped even further, dragging the global economy into an even worse condition, He said.
Right now, the real economy of the United States is on the mend. Under these circumstances, if QE isn't tapered accordingly, inflation will become an increasingly serious issue. For instance, a price surge in the global bulk commodities market would be unbearable for emerging markets. The QE exit is beneficial for curbing global inflation, He said.
"If QE is ended after the global recovery, it will be too late because by then, global inflation will be far too serious," He claimed.
Yuan depreciation?
The QE exit will undoubtedly result in a stronger U.S. dollar, but will that bring about the depreciation of the yuan? He said some factors influencing the yuan exchange rate are known to analysts, while some are still uncertain.
The known factors supporting a stronger yuan against the U.S. dollar include China's trade surplus, its mounting foreign exchange reserve and a higher interest rate level. Such a high yield is very attractive for global investors, said He. "The uncertain factors include the high leverage rate and alarming local government debt levels. Their influence on the yuan exchange rate is still uncertain right now."
"One thing is clear. The complete exit of the United States from QE requires the interest rate to be brought back to a normal level," He said. "Even if the monthly asset purchase is scaled back to zero, it doesn't mean a complete exit from QE. A reasonable interest rate in banks is still required."
An interest rate increase will be postponed until 2015. Even if it happens, it will be conducted gradually. The Fed has implied even if the unemployment rate falls below 6.5 percent, the low interest rate policy—from zero to 0.25 percent—will be carried out over a long period, He said.
"Therefore, the QE exit will have limited impact on the depreciation of the yuan," He concluded.
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