China’s Lou Urges Fed to Weigh Risks of Tapering Bond Buying

Chinese Finance Minister Lou Jiwei urged the Federal Reserve to be “highly alert” to the global impact from any decision to begin reducing stimulus by tapering $85 billion in monthly bond buying known as quantitative easing.

“We support the Fed’s consideration of exiting from QE, but it should heed the impact of its policy on the global economy and financial markets,” said Lou, who is attending a two-day U.S.-China Strategic and Economic Dialogue in Washington. “The U.S. policy not only affects the U.S. but has a spillover effect on the global economy,” especially for emerging markets, he said at a press conference.

Minutes of the June 18-19 meeting by the Federal Open Market Committee showed that about half of the committee’s 19 participants wanted to halt the bond purchases by the end of this year.

While China isn’t in a position to comment on the Fed’s decision, “if measured by the unemployment rate of 7.6 percent, it is probably early to exit,” Lou said.

The Fed’s exit strategy won’t affect China “too much” as Beijing controls capital flow, Lou said.

Growth in China’s gross domestic product during the first half of the year probably dropped below 7.7 percent, “but not too far from it,” he said.

China’s Slowdown

China, the world’s largest economy after the U.S., grew below 8 percent last year for the first time since 1999 as the government takes steps to reduce reliance on exports and investment for growth.

Lou said he’s confident in achieving a 7 percent growth rate this year. That is lower than the government’s official growth target of 7.5 percent.

When asked if there’s a limit that Beijing will tolerate in the slowdown, Lou said even a 6.5 percent expansion rate won’t be a “big problem.”

The slowdown is “necessary” to achieve s structural transition, said Lou, adding that the government is deepening reforms in areas including public financing and financial services to achieve more sustainable growth.

China has shared its plan for further reforms with U.S. officials during the meetings, Lou said.

Yi Gang, a deputy governor of the People’s Bank of China, told reporters in a separate press conference today that China is “well prepared” for the potential impact from the Fed’s tapering of its stimulus as “abundant liquidity” in China’s financial system and high reserve requirements provide enough of a buffer.

Exchange Rates

Yi also said China is “unwaveringly promoting” a market-determined exchange rate and the convertability of the nation’s capital account.

The yuan has gained 1.6 percent against the dollar this year, extending its increase since 2005 to 35 percent, the most among 31 major currencies tracked by Bloomberg.

Currency derivatives have reflected both appreciation and depreciation expectations, suggesting that market demand and supply is determining the yuan rate, Yi said.

Yi pledged to foster financial stability after the PBOC refrained from adding cash to the banking system last month in a move to slow lending, causing a surge in inter-bank borrowing costs and the worst cash crunch in more than a decade.

China’s money market has recovered to normal levels and the financial market is stable, he said. “At the moment, the tension has been relieved,” Yi said.

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