Expected weakening of US monetary stimulus will pose minor market risks
The expected weakening of US monetary stimulus could have spillover effects on China in the form of heightened financial market volatility and slowing capital inflows, but strong economic fundamentals will help mitigate these. risks, experts said Wednesday.
China’s robust economic recovery, good control of the COVID-19 outbreak, and relatively wide leeway will help yuan-denominated assets withstand risks from any halt to the Federal Reserve’s quantitative easing program American, they said.
“Domestic stock, currency and bond markets will all be at risk from a possible slowdown in quantitative easing in the United States,” said Wang Youxin, senior researcher at the Bank of China.
Any reduction in the U.S. quantitative easing program could shake investor sentiment and increase volatility in U.S. stocks, which could spill over to the domestic market to some extent, Wang said.
As monetary conditions tighten, US bond yields and the greenback could rebound and hurt the comparative advantage of the renminbi and Chinese bonds, leading to a slowdown in foreign capital inflows and fluctuations in the renminbi, said Wang.
“Still, China’s strong economic growth and resilient financial system will be able to withstand such risks. The economy is expected to achieve economic growth of over 8% this year and continue to surpass the global level, providing protection strong against external shocks, ”he added. Wang said.
Relatively wide room for maneuver will be another stabilizer for renminbi-denominated assets, Wang added, citing that China’s macro leverage ratio has declined for two consecutive quarters while the level of public debt is much lower. to that of many developed economies.
Tony Sycamore, Asia-Pacific analyst at City Index, a UK-based trading services provider part of Gain Capital, said he expects the renminbi to remain supported by interest rate differentials. interest and strong economic fundamentals, among other factors.
Chinese authorities have largely contained the COVID-19 outbreak and refrained from large budget deficits, thereby supporting the outlook for the economy and the renminbi, Sycamore said.
The Chinese economy has recorded “an incredibly rapid recovery” with its GDP expected to grow nearly 10% this year, before slowing to around 5.5% to 6% next year, he said. .
Expectations that the Fed could start cutting QE somewhere in the next few quarters, perhaps by the end of this year or early 2022, intensified after the US economy rebounded sharply and drives up prices.
After the Fed’s April meeting suggested the possibility of starting to discuss adjusting the pace of asset purchases in upcoming meetings, Fed Governor Lael Brainard said on Tuesday he was important to be aware of downside and upside inflation risks.
Zhu Haibin, JPMorgan’s chief economist for China, said Fed meetings are expected to start talking about an exit from QE in the coming months and could start concrete actions early next year.
Investors should pay close attention to May’s US non-farm payroll data, due Friday, which will give more clues about the shape of the US labor market recovery and therefore the timing. of the Fed’s QE cut, Sycamore said.