Ahead of G20, China urges caution in Fed policy tapering

Tue Aug 27, 2013 5:48am EDT
 
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By Kevin Yao

BEIJING (Reuters) - The U.S. Federal Reserve must consider when and how fast it unwinds its economic stimulus to avoid harming emerging markets, although the impact on China could be more limited compared with some other countries, senior Chinese officials said on Tuesday.

The warning by China's Vice Finance Minister Zhu Guangyao and central bank Vice Governor Yi Gang came as economies from Brazil to Indonesia struggle to cope with capital flight as U.S. interest rates rise ahead of an expected tapering off in the Fed's bond buying program that unleashed liquidity across the world.

"The U.S. economy is showing some positive signs and is recovering gradually and we welcome this," Zhu told a briefing ahead of G20 leaders' summit in Russia next week.

"But the United States - the main currency issuing country - must consider the spill-over effect of its monetary policy, especially the opportunity and rhythm of its exit from the ultra-loose monetary policy," Zhu said.

Apart from being a leading emerging market, China has a major stake in the direction of Fed policy as one of the biggest creditors to the United States. A substantial portion of its foreign exchange reserves - the world's biggest by far at some $3.5 trillion - are invested in U.S. government, agency and corporate debt.

Financial markets are fretting that the U.S. Fed might decide to reduce its monthly bond buying when it meets on Sept 17 and 18. Fed Chairman Ben Bernanke said in June the bond buying program could be halted by the middle of 2014.

The prospects of the Fed reining in its stimulus comes as China's economic growth slows down to its weakest pace in two decades, partly as the government tries to reduce its reliance on exports in favor of domestic consumption.

Zhu said China faced a severe economic environment at home and abroad, but it would keep economic policies stable.   Continued...

 
China's Vice Finance Minister Zhu Guangyao addresses the media during a news conference at a hotel in Los Cabos June 17, 2012. REUTERS/Stringer