The booth of Gain Capital during an expo in Shanghai. [Photo/China Daily]

Expected tapering of US monetary stimulus to pose minor market risks

The expected tapering of US monetary stimulus moves may have some spillover effects on China in the form of higher financial market volatility and slower capital inflows, but strong economic fundamentals will help buffer such risks, experts said on Wednesday.

China's robust economic recovery, good control of the COVID-19 epidemic, and relatively ample policy room will help yuan-denominated assets withstand risks arising from any winding down of the US Federal Reserve's quantitative easing program, they said.

"The domestic stock, foreign exchange and bond markets will all be exposed to risks due to a possible QE tapering in the United States," said Wang Youxin, a senior researcher with Bank of China.

Any scaling down of the US' QE program may rattle investor sentiment and heighten volatility in US stocks, which could reverberate to some extent in the domestic market, Wang said.

As monetary conditions tighten, US bond yields and the greenback may see a rally and impair the comparative advantage of the renminbi and Chinese bonds, leading to slower foreign capital inflows and fluctuations in the renminbi, Wang said.

"Yet China's solid economic growth and resilient financial system will be capable of withstanding such risks. The economy is expected to achieve a more than 8 percent economic growth this year and continue to outpace the global level, providing a strong buffer against external shocks," Wang said.

Relatively ample policy room will be another stabilizer for renminbi-denominated assets, Wang added, citing that China's macro leverage ratio has decreased for two quarters in a row while the government debt level is much lower than many developed economies.

Tony Sycamore, Asia-Pacific analyst with City Index, a United Kingdom-based trading service provider and part of Gain Capital, said he expects the renminbi to remain supported by interest rate differentials and strong economic fundamentals, among other factors.

The Chinese authorities have largely contained the COVID-19 epidemic and refrained from having large fiscal deficits, thus supporting the prospects of both the economy and the renminbi, Sycamore said.

The Chinese economy has delivered "an incredibly fast recovery "with its GDP expected to grow by nearly 10 percent this year, before slowing to about 5.5 percent to 6 percent next year, he said.

Expectations that the Fed may start QE tapering somewhere in the next few quarters, possibly by the end of this year or early 2022, have heated up after the US economy delivered a strong rebound and pushed up price levels.

After the Fed's April meeting suggested the possibility of beginning to discuss adjusting the pace of asset purchases in upcoming meetings, Fed Governor Lael Brainard said on Tuesday it is important to be attentive to both downside and upside risks of inflation.

Zhu Haibin, JPMorgan's chief China economist, said the Fed meetings are expected to start talking about a QE exit in the next few months and may commence the real actions early next year.

Investors need to pay particular attention to May's US nonfarm payroll data, due on Friday, which will give more clues to the shape of labor market recovery in the US and hence the timetable of the Fed's QE tapering, Sycamore said.