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The U.S. Federal Reserve （FED） recently announced the end of its third round of quantitative easing（QE） stimulus， as it sees the economy is on track for recovering from the worst financial crisis in decades. For China’s flagging export sector， the Fed’s decision is undoubtedly great news. Meanwhile， U.S. consumers will also benefit from the QE exit， as they will have more choices of Chinese goods.
The Fed’s end of its six years of pump-priming indicates at least two encouraging points. First， the U.S. economy is seeing signs of a pickup. According to the Fed’s statement on the QE exit decision， information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions have improved somewhat further， with solid job gains and a lower unemployment rate. On balance， a range of labor market indicators suggest that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing， while the recovery in the housing sector remains slow. Judging by the statement， the U.S. economy has maintained a strong momentum of development since 2013. Meanwhile， the purchasing power of U.S. households is continually on the rise.
Second， the Chinese currency yuan will be devalued. Under the U.S. dollar-dominated international monetary system， it is an objective law that if the U.S. dollar rallies， currencies of emerging economies will fall. Only backed by a strong economy can a currency remain strong while the U.S. dollar rallies， otherwise the economy concerned is surely impacted. For China， as Chinese national economic growth is currently flat， the U.S. QE exit will probably lead to funds flowing back to the United States， causing pressure on the depreciation of the yuan. Though some U.S. officials have recently claimed that the Chinese currency is being undervalued， the already highly market-oriented exchange rate of the yuan cannot remain unchanged. What really concerns China is how much the yuan will depreciate.
A strengthening U.S. economy and depreciating yuan are favorable for China’s export businesses. Since the outbreak of the international financial crisis in late 2008， affected by the decline of U.S. purchasing power as well as the depreciation of the U.S. dollar， China’s exports have been heavily hit. Although the Chinese Government has introduced many policies to boost exports， the effects have not been prominent due to the depressed U.S. purchasing power. Over the past 30 years， Chinese and U.S. economies have been highly complementary to each other， and this situation has not changed since the international financial crisis. Therefore， with the rise of U.S. purchasing power， China’s export market is likely to revive soon. However， China should not be overly optimistic with the improvement of its export situation.
The impact of the end of QE on emerging economies has just begun. The QE exit as well as the ensuing appreciation of the U.S. dollar will further speed up the international capital outflows from emerging economies， including China， as investors pour cash back to the United States for higher returns. If liquidity in the Chinese market is tight， investor confidence will be heavily impacted. What’s more， those industries with grave asset bubbles could be potentially plunged into new crises. In addition， it will inevitably cause the decline of China’s asset prices. Correspondingly， China’s monetary policy will also be in an awkward position， grappling with questions such as whether or not to cut reserve requirements or loosen credit controls. There is little room for China to make monetary policy mistakes.
For the time being， the opportunities brought by the U.S. QE exit for China’s exports have exceeded the risks of the international capital outflow. With$4 trillion of foreign reserves as well as a relatively lower level of dependence on foreign capital inflows， the spillovers of the QE exit are likely to be relatively minimal for China. But in the long run， the relevant government departments of China should remain alert， preparing for a period of possible volatility.
The Fed’s end of its six years of pump-priming indicates at least two encouraging points. First， the U.S. economy is seeing signs of a pickup. According to the Fed’s statement on the QE exit decision， information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions have improved somewhat further， with solid job gains and a lower unemployment rate. On balance， a range of labor market indicators suggest that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing， while the recovery in the housing sector remains slow. Judging by the statement， the U.S. economy has maintained a strong momentum of development since 2013. Meanwhile， the purchasing power of U.S. households is continually on the rise.
Second， the Chinese currency yuan will be devalued. Under the U.S. dollar-dominated international monetary system， it is an objective law that if the U.S. dollar rallies， currencies of emerging economies will fall. Only backed by a strong economy can a currency remain strong while the U.S. dollar rallies， otherwise the economy concerned is surely impacted. For China， as Chinese national economic growth is currently flat， the U.S. QE exit will probably lead to funds flowing back to the United States， causing pressure on the depreciation of the yuan. Though some U.S. officials have recently claimed that the Chinese currency is being undervalued， the already highly market-oriented exchange rate of the yuan cannot remain unchanged. What really concerns China is how much the yuan will depreciate.
A strengthening U.S. economy and depreciating yuan are favorable for China’s export businesses. Since the outbreak of the international financial crisis in late 2008， affected by the decline of U.S. purchasing power as well as the depreciation of the U.S. dollar， China’s exports have been heavily hit. Although the Chinese Government has introduced many policies to boost exports， the effects have not been prominent due to the depressed U.S. purchasing power. Over the past 30 years， Chinese and U.S. economies have been highly complementary to each other， and this situation has not changed since the international financial crisis. Therefore， with the rise of U.S. purchasing power， China’s export market is likely to revive soon. However， China should not be overly optimistic with the improvement of its export situation.
The impact of the end of QE on emerging economies has just begun. The QE exit as well as the ensuing appreciation of the U.S. dollar will further speed up the international capital outflows from emerging economies， including China， as investors pour cash back to the United States for higher returns. If liquidity in the Chinese market is tight， investor confidence will be heavily impacted. What’s more， those industries with grave asset bubbles could be potentially plunged into new crises. In addition， it will inevitably cause the decline of China’s asset prices. Correspondingly， China’s monetary policy will also be in an awkward position， grappling with questions such as whether or not to cut reserve requirements or loosen credit controls. There is little room for China to make monetary policy mistakes.
For the time being， the opportunities brought by the U.S. QE exit for China’s exports have exceeded the risks of the international capital outflow. With$4 trillion of foreign reserves as well as a relatively lower level of dependence on foreign capital inflows， the spillovers of the QE exit are likely to be relatively minimal for China. But in the long run， the relevant government departments of China should remain alert， preparing for a period of possible volatility.