China to Withstand Emerging Stocks Rout After QE, BofA’s Lu Says

China, the best-performing Asian stock market last month, will weather the tapering of U.S. stimulus that has triggered routs in other emerging-market equities, according to a Bank of America Corp. report.

The world’s second-largest economy has low foreign debt, “huge” foreign exchange reserves, a “sustained” current account surplus and high savings that shield it from capital outflows, wrote Lu Ting, a Hong Kong-based economist at Bank of America, ranked first for Asia research in 2011 by Institutional Investor magazine. The government may postpone widening a trading band for the yuan and slow the pace of removing capital controls to ensure economic and financial stability, said Lu.

Foreign investors sold a net $2.2 billion of Thai, Indonesian and Philippine shares last month amid signs of slowing regional economic growth and speculation that the Federal Reserve will soon cut stimulus. Minutes of the Fed’s July meeting released on Aug. 21 showed policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to taper purchases this year if the economy strengthens, with a few saying a reduction may be needed soon.

China’s stocks have rallied over the past month on signs economic growth is stabilizing. Growth in industrial output and money supply accelerated in July, while an official purchasing mangers’ index released yesterday showed manufacturing rose to a 16-month high in August.

The Shanghai Composite Index jumped 5.3 percent in August, compared with losses ranging from 8.5 percent to 9.1 percent for benchmark indexes in Indonesia, Thailand and the Philippines.

“The weakness in some emerging markets could convince perpetual China bears to revisit the case of China by focusing on some important factors” such as the current account and savings rates, Lu wrote in today’s report. “China could even gain to some extent from the U.S. QE tapering.”

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