Mixed bag for China as US Fed ends QE stimulus

Analysts say China has responded well to finish of bond-buying plan

As expected, the US Federal Reserve on Wednesday ended its long running bond-buying stimulus program, and analysts said that China's economy has responded well to the long anticipated phase out of the program that pumped money into the US economy.

Also referred to as quantitative easing (QE), the US central bank had been trimming its monthly bond purchases from $85 billion in Treasury and mortgage bonds to $15 billion since 2013. It implemented the program to hold down long-term interest rates and bolster a slow US recovery from the 2008 financial crisis.

"QE in the end was good for emerging markets like China. QE helped the US economy to recover and that provided stimulus to China and others through their exports. In the beginning of QE there was a concern that it might lead to a devaluation of the dollar, but that never happened - the dollar has strengthened throughout the QE period," David Dollar, senior fellow at the John L. Thornton China Center at the Brookings Institution told China Daily in an email.

Stephen G. Cecchetti, professor of international economics at the Brandeis International Business School at Brandeis University in Waltham, Massachusetts, said accommodative monetary policy in the advanced economies (like the US) was "essential to ensure strong, stable and balanced growth going forward".

"This was good for everyone," said Cecchetti. "Given the importance of advanced economy demand for the prosperity of emerging market economies, it is clear that they rise and fall together. That is, when growth slows in the advanced world, it results in slower growth elsewhere."

Some analysts believe that QE provided plusses and minuses for China.

"China's main export market grew faster than it would have and helped prevent an even worse global demand slowdown. Much of the cheap money made available to financial institutions made its way to developing countries where investors could earn higher rates of return than in the US," said Adam Hersh, senior economist at the Center for American Progress, a Washington think tank.

Hersh said the downside for China, given the managed exchange rate, is that such abnormally large capital flows into China and other developing economies can cause inflationary pressures. "China has managed this okay," he said.

"Without QE, the world would be in a deep recession, if not a depression," said Gary Hufbauer, senior fellow at the Washington-based Peterson Institute for International Economics.

Hufbauer believes the end of QE will have a modest effect on China, thanks to zero short-term interest rates around most of the world. He said China remains an attractive place to invest for both foreign direct investment and debt instruments.

Even as it ended QE, the Federal Reserve said it would maintain its benchmark short-term rate near zero "for a considerable time". Many economic observers predict it won't raise that rate before the middle of next year. The benchmark rate helps determine interest rates on loans in the US.

"The Fed is ending QE because it now believes the US recovery can be self sustaining. That acceleration of US growth is good for China and other emerging markets. US dollar interest rates are likely to rise but emerging markets can set their own independent monetary policy as long as their exchange rates are flexible," said Dollar.

Cecchetti cautions that other advanced economies' exit from extraordinary monetary accommodation like QE will not be synchronized. "Some countries and currency areas will be tightening while others are continuing to ease. This will continue to create volatility in both exchange rates and capital flows. But again, it looks better than the alternative. The global economy will be better off with stable, strong growth and low stable inflation in the advanced economies," he added.

paulwelitzkin@chinadailyusa.com