US Fed likely to start QE taper in 2014 Quantitative easing Reduction Affects emerging Economy

On Dec. 18, 2013, the U.S. Federal Reserve (the Fed) decided to reduce the pace of asset purchasing from $85 billion per month to $75 billion. Five years since the recession began, this is an important turning point for the U.S. unconventional monetary policy. Recent economic data have been optimistic, encouraging Fed officials to take action. In addition, the budgetary battle between President Obama and the Senate and House of Representatives was temporarily settled in December 2013, which will significantly reduce policy uncertainty and promote economic growth. The U.S. economic recovery and QE tapering has important implications for the world, and this has been widely debated in China recently. The spillover mechanism is complicated. I will analyze the mechanism from the trade, financial and national wealth channels. (1) Trade channel: The United States is the biggest consumption market in the world. Its economic recovery will increase its demand for goods from other countries. In November 2013, exports from China to the U.S. increased 17.7 percent year on year, the highest increase since June 2012. The U.S. economic recovery could have positive effects on emerging countries, including China. QE tapering could make the U.S. dollar stronger, which would strengthen its purchasing power and import demand. (2) Financial channel: There is big interest rate gap between the United States and emerging markets. International capital has flowed into the emerging markets in pursuit of higher investment returns on stocks and real estate. The U.S. economic recovery will produce more domestic investment opportunity. The zero interest rate policy will gradually come to an end. The decreasing interest rate gap will cause the capital to flow back to the U.S. market. The capital outflow will produce some financial risk for the emerging markets. The exchange rate of some emerging markets, such as India, Brazil and Indonesia has significantly depreciated recently, providing clear evidence of capital outflow. (3) National wealth channel: China has bought huge amounts of U.S. treasury securities using the foreign exchange reserve. The Fed's QE policy is "printing money" to buy U.S. treasury securities. QE produces an invisible threat to the national wealth of China because the exchange rate of the dollar and the value of the securities will depreciate. From this perspective, QE tapering helps creditor countries. The dollar exchange rate has appreciated to some degree after the QE tapering. This will benefit the foreign exchange reserve wealth of China. Whether financial risk will produce serious economic consequence depends on the stability and flexibility of an economy. China is the world's second biggest economy and its economic growth is mainly determined by domestic factors. The government should consistently push institutional reform and strengthen fragile areas. The spillover effect of foreign policy should be taken into account when making policy. US Fed likely to start QE taper in 2014 Quantitative easing Reduction from America,for more information about financial news global plus china subscribe and browse channal at http://youtube.com/user/cosmeticmachines