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Nation 'should keep an eye on capital outflow'

By Wei Tian in Shanghaiand Zhang Yuwei in New York | China Daily | Updated: 2013-07-19 07:31
China should be vigilant against capital outflow even if the chances of that happening are limited, experts said, after United States Federal Reserve Chairman Ben Bernanke reiterated his stance of tapering off the quantitative easing measures.

On Wednesday, Bernanke said the US central bank would carry on with its plan to start scaling back its bond-purchasing stimulus program later this year, although not on a fixed schedule.

"Our asset purchases depend on economic and financial developments. They are by no means on a preset course," Bernanke said in his prepared semi-annual testimony before the House Financial Services Committee.

"If economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly," he added.

Experts said Bernanke's remarks contained little "new information". The comments, they said, were simply a reiteration of his June indication that the US will taper off the $85 billion-a-month buying program of Treasury bonds and mortgage-backed securities - the so-called quantitative easing 3, known as QE3 - to hold down long-term interest rates and boost the economy.

With unemployment still high and declining only gradually, and with inflation running below the long-term objective, some analysts said a highly accommodative monetary policy will remain appropriate for the foreseeable future.

US markets closed higher on Wednesday with the chairman's remarks indicating that options to taper off QE3 are still open.

Markets in Europe also gained, while markets in Asia mostly closed higher, except for the Shanghai Composite Index, which fell 1 percent.

Many experts, including Sophii Weng, an economist with Standard Chartered Bank in New York, said the plan to taper off QE3 is still on the cards for later this year.

Weng said that with the US maintaining its growth momentum - even with few signs of a synchronized global economic recovery - it is natural to see further US dollar gains in the third quarter.

Guo Feng, a senior economist with the Washington-based Institute of International Finance, said: "The Fed gained more confidence in the labor market outlook and is expected to begin phasing out asset purchases. But the Fed needs to clarify more information on the timing of QE3 easing to reduce market tensions.

"As the economic recovery and the end of QE3 in the US coincide with the slowing economic activity in China, we see that some international capital flew out of China, which put some pressure on the yuan's depreciation," said Guo.

China's economy posted a second-quarter growth rate of 7.5 percent, down from the 7.7 reported in the first quarter.

However, Wang Tao, chief China economist at UBS AG, said during a teleconference on Thursday that the impact of any capital outflow would be limited.

"China's capital account is not open and there won't be massive capital outflow even if overseas yields demonstrate an increasing trend," Wang said, adding that most of the foreign investment in China was not in the form of securities investment, thus short-term capital outflow is not in sight.

Wang said the yuan would see mild depreciation against the US dollar, with the exchange rate down to 6.2 from the current level of 6.14.

Ye Tan, a financial commentator, said that although Bernanke's speech seems to be vague, China should still be alert to the possible impact once the Fed accelerates its plan to abandon its QE measures.

"Once the US quits QE, there will be more 'hot-money' pulling out from China, pursuing a strong dollar. Therefore we should keep our powder dry in the months to come," she said.

Such preparation includes more open policies for foreign investment, wider use of the yuan and measures to support foreign trade, Ye said.

"If these indicators improve, we won't be afraid of capital outflow."

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