Impact of Fed taper on China to be limited: US expert

WASHINGTON - The US Federal Reserve's latest decision to trim its stimulus program would add headwinds to emerging economies, but its impact on resilient ones like China would be limited, said a leading expert of the Institute of International Finance (IIF).

"The effect on the merging countries will be longer lasting than just short-term reaction to the FOMC announcement," Hung Tran, the IIF's executive managing director, told Xinhua in an interview, referring to the modest tapering of asset purchases announced Wednesday by the Federal Open Market Committee (FOMC), the Fed's policy-making panel.

Tran said market reaction to the Fed's decision is positive so far, in sharp contrast to the wild roller-coaster ride that markets endured this summer after Fed Chairman Ben Bernanke first indicated a possible tapering later this year.

Through all these months of discussions, the stimulus winding down is "well-communicated," he said, adding the withdrawal is a sign of growing conviction that the US economy is strengthening.

While the Fed's endorsement of an improving US economy would be a "positive message" to the global economy, the Fed should also be mindful of the impact of its actions, especially during the transition from late 2014 to 2015, when the bond-buying program gradually comes to an end and the initial hike of short-term interest rates kicks in, Tran cautioned.

He also warned the withdrawal of liquidity supply and the eventual normalization of Fed's monetary policy may add headwinds to many emerging economies.

In his view, pillars of their strong economic growth in the past decades -- strong growth in trade, commodities supercycle, and dividends of previous reforms --are running out of steam, so the growth momentum ahead hinges on "quick implementation" of a new round of reforms and the design of macroeconomic policy to reduce both internal and external imbalances.

In this sense, "structural reforms will go beyond the near-term reaction to the FOMC announcement," Tran added.

As the US dollar may strengthen against currencies of emerging economies and international investors will reassess their investment portfolio, the Fed's decision may alter the direction of capital flows.

Tran said within the emerging economies group, countries with relatively high current account deficit, big fiscal shortfall, high dependence on international financing, and large macroeconomic imbalances, like India, Brazil and Indonesia, would be more vulnerable to the shocks of market volatility. But performances of countries with less economic imbalances, like the Republic of Korea and Malaysia, are likely to be more stable.

Tran said the tapering may have limited impact on China and a big capital outflow is unlikely. "China is a very large economy, and its interaction with the global financial market is still limited," he said, adding China's growth is largely driven by domestic factors.

He noted China's current account surplus and huge foreign exchange reserves would also help the country weather outside impacts.