The US Federal Reserve announced on Wednesday that it will begin reducing its bond purchases from January, setting market speculation to rest about the timing of the wind-down of its quantitative easing. The central bank said it will cut its monthly asset purchases by US$10 billion to US$75 billion.
The decision to start tapering the bond-buying program reflects the Fed’s improved confidence over the US economic recovery. If the labor market continues to recover, the bond purchases are likely to be cut at a “measured” pace throughout next year, outgoing Fed chairman Ben Bernanke said.
Meanwhile, markets and financial regulators around the world are bracing for the fallout of the US move, with shifts seen in global capital flows and interest rate movements.
In Hong Kong, given the local currency’s peg to the US dollar, the market watchdog is concerned about a potential rise in interest rates and its impact on asset prices. As for China, policy makers in Beijing may be more worried about a potential depreciation of the renminbi.
It is too early to predict the impact of the US tapering on Hong Kong’s economy and property prices, Eddie Yue, acting chief executive of the Hong Kong Monetary Authority, said on Thursday. The regulator urged local banks to improve liquidity management and prevent risks from potential rise in interest rates. Yue said it is normal for capital to flow in and out of the international city.
The US tapering may create some short-term market volatility, said Anita Fung, the Hong Kong chief of HSBC Holdings Plc. (00005.HK). Given that the Fed is committed to maintaining a highly accommodative monetary policy for a considerable period, there is no exigency to revise HSBC’s savings and lending rates in Hong Kong at this stage, Fung said.
The impact of the US tapering, particularly whether it will lead to large-scale capital outflow, will remain a major concern for Chinese leaders in the coming two to three quarters, observers say. Authorities will be ready to intervene in the currency market if necessary to prevent any sudden depreciation of the renminbi, they say.
JPMorgan chief China economist Zhu Haibin said in a media briefing this week that the impact of the US tapering on China will be milder than that on other emerging economies as China does not have a fully open capital account. However, the renminbi could face pressure if currencies in other emerging economies fall due to the US quantitative easing exit, Zhu said.
PBoC injects short-term liquidity into market
The People’s Bank of China (PBoC) said it has recently injected liquidity into the market and will continue to do so if necessary, the Hong Kong Economic Journal reported Thursday, citing a microblog post by the central bank. The PBoC made the infusion through its short-term liquidity operations, introduced earlier this year. The amount was not disclosed but financial website finance.ifung.com, citing an unnamed source, said it was 200 billion yuan. SLO was first used in October to pump 59 billion yuan (US$9.71 billion) into the financial system in a two-day operation.
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