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QE tapering of little concern for China

The US Federal Reserve's tapering of quantitative easing (QE) will not have a significant effect on China's economic growth, analysts contend.

Last Thursday, after a meeting of the Fed's policy board, the federal open market committee (FOMC), a "modest reduction" was announced in monthly asset purchases from $85 billion to $75 billion, with another 10 billion trimmed from mortgage-backed securities and Treasury bonds.

The news brought chaos to some emerging economies, along with sliding asset prices and collapsing currencies. The consequences for China, however, are likely to be very limited, analysts said.

"Will China be impacted in a similar way? We don't think so. Actually we believe it's time for markets to revisit some of China's strength while not forgetting many of China's problems," [Businesses Registration]said Lu Ting, chief China economist with Bank of America Merrill Lynch, in a research note.

Lu maintains that China could be immune to the ill effects of QE tapering for several reasons: capital control; high savings, high investment and high manufacturing capacity; huge foreign exchange reserves; low foreign debt; and sustained current account surpluses. Furthermore, China is a very large economy with limited dependence on exports and a government which does not need to ramp up subsidies to maintain its power, Lu said.

Lu expects the Fed to shave off $10 billion at each subsequent meeting from January, conditional on hitting forecasts.

Cai Hongbo, associate professor at Beijing Normal University, said the effect on China might be less serious than expected. As the Fed will be scaling back asset purchases moderately and gradually, there will be time and room for other economies to prepare, Cai said.

Cai downplayed the risk of substantial capital outflow, the main fear of market players before the FOMC meeting. Cross-border capital flow, especially huge capital outflow in a short period of time, [Hong Kong Company Formation & Registration]is strictly monitored by the People's Bank of China and the foreign exchange regulator, Cai said.

Gradual recovery of the US economy is behind the easing, which, according to chief economist at the Bank of Communications Lian Ping, should be good news for the recovery of the rest of the world including China.

China will be more appealing to foreign investors as its economy continues to recover, he said.

Lian expects continual capital flow into China in the coming quarters as foreign investors remained optimistic over growth, as shown by the enthusiasm for the Chinese yuan in the fourth quarter of 2013. With more capital expected to flood into China, Lian is unconcerned by the threat of devaluation of the yuan against a strong US dollar.

Lu Ting, of Bank of America Merrill Lynch, maintains that China is most likely to set its gross domestic product (GDP) growth target at 7.5 percent for 2014. He also expects fiscal policy to remain relatively proactive next year.

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