Decision to reduce balance sheet in line with expectations
The U.S.' decision to reduce its $4.5 trillion balance sheet will not exert too much influence over China, although the yuan may weaken slightly against the U.S. dollar in the short term, Chinese experts said Thursday.
The comments came after the U.S. Federal Reserve announced Wednesday (U.S. time) it would begin reducing its balance sheet in October, as the Fed said in a statement on its website.
A sum of $10 billion in securities holdings will be reduced in October and there will be further and larger reductions in the coming years, according to the statement.
With the U.S. economy gradually recovering, the Fed is also expected to raise interest rates again before the end of 2017 and three more times in 2018, The Washington Post said Wednesday.
Following the Fed statement, the yuan's central parity rate against the dollar weakened by 197 basis points day-on-day to a September low of 6.5867 on Thursday, data from the People's Bank of China, the central bank, showed.
Spot gold slid 0.41 percent to $1,295.52 on Thursday, according to data from industry website cngold.org.
The Fed's announcement was in line with market expectations, and UBS had already forecast it would raise interest rates in December, and twice or three times next year, Wang Tao, chief economist at UBS, told the Global Times on Thursday.
The Fed is expected to complete the plan to reduce its balance sheet within three years, and during this period rates will rise several times in accordance with market performance, Wang said, noting that the Fed is on track to phase out its previously extremely loose currency policies.
The Fed's positive views of U.S. economic growth as well as the expected progress of U.S. President Donald Trump's tax reform may help to boost the dollar against other currencies, according to a report sent to the Global Times by the financial research center under Bank of Communications (BoCom).
Thus, the exchange rate of the Chinese currency will face some pressure in the short term, which, combined with a slight fallback in the country's short-term economic data, may result in two-way fluctuations of the yuan's rate, the report continued.
Limited effect
But the Fed's announcement will not put pressure on China's capital outflows, experts noted.
"We can see that the country's capital outflows have been relieved over the past few months thanks to tightened regulation and the yuan's appreciation against the dollar," Wang said.
Although the Fed's move will have limited influence on China in terms of the exchange rate and cross-border capital flows in the short term, it might add uncertainties for the Chinese economy in the long run, according to Xu Gao, chief economist at China Everbright Securities Asset Management.
One or two years later, the effects of the reduction of the large-scale U.S. balance sheet will gradually appear, along with the recovery of the U.S. economy, and what impact that will bring for China is unknown at present, Xu told the Global Times on Thursday.
He added that China needs to maintain domestic economic stability in order to cope with such uncertainties in the future.
China is unlikely to follow suit and reduce its balance sheet, as China's currency policy is largely independent and the Fed's decision is just a move to make its currency supply return to normal, Liu Jian, a senior research fellow at BoCom, told the Global Times on Thursday.
After the global financial crisis in 2008, the Fed's holdings of government bonds and mortgage securities rose from $900 billion to an unprecedented $4.5 trillion in a bid to ease the pressure on the U.S. economy, according to The Washington Post.
