Fed's QE taper risks slowing Chinese reforms

Beijing may be forced to slow the pace of its capital account opening and yuan reform in order to safeguard financial stability as the United States Federal Reserve gradually exits its bond-buying programme, say analysts.

But the Fed's tapering of its quantitative easing announced this week would have only a muted impact on the yuan exchange rate, they added, since China ran a current account surplus of US$138.8 billion in the first three quarters and sat on the world's largest foreign-exchange reserves of US$3.7 trillion.

However, the Fed's decision will alter the landscape of the global economy and the direction of capital flows, which will inevitably take a toll on, and probably delay, Beijing's plan to relax its control over capital flows.

Last month, the central government unveiled a package of reforms it plans to roll out over the next decade as it bids to ease distortions in resource allocation that have led to huge imbalances in the economy.

"With the rising uncertainty on emerging markets due to the coming QE tapering, the Chinese government will most likely put special emphasis on financial and economic stability," said Bank of America-Merrill Lynch China economist Lu Ting.

Lu expects Beijing to postpone the widening of the daily trading band of the yuan against the US dollar, keep the yuan's exchange rate against the greenback stable and slow the pace of loosening capital controls.

The Fed announced on Wednesday that it would begin pruning its monthly bond-buying programme to US$75 billion from US$85 billion from January, marking the first step in winding back the stimulus introduced to counter the effects of the 2008 global financial crisis.