Emerging markets still react to Fed

Updated: 2013-06-25 11:05

By Zhang Yuwei in New York (China Daily)

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The Federal Reserve's recent signal that it would withdraw stimulus efforts - otherwise known as quantitative easing round 3 - has rattled markets in Asia and Europe, as well as drawn attention from leaders in emerging economies to forge a possible "safety net" to weather the uncertainty in global financial markets.

In a phone conversation with his Brazilian counterpart Dilma Rousseff on Monday, Chinese President Xi Jinping noted that some new and complex elements have occurred in international financial markets that deserved the BRICS nations' close attention.

The Chinese president, who took office in March, said the BRICS nations - Brazil, Russia, India, China and South Africa - should boost communication and cooperation in the financial sector and speed up the formation of a financial safety net.

Rousseff, who met with her Chinese counterpart on the sidelines of the 5th BRICS summit held in Durban in March and reached a broad consensus on friendly bilateral cooperation in a variety of areas, said Brazil is willing to maintain close communication and coordination with China and other BRICS countries in the financial field to jointly tackle challenges and safeguard the bloc's common interests.

"The most effective 'safety net' for emerging economies is sound policy," said Lawrence Goodman, president of the Center for Financial Stability, a think tank in New York. "There is no one size fits all."

Back in March, the bloc had agreed to set up a $100 billion contingency fund among themselves, a move seen as a major step in advancing the collective power of the BRICS nations. The self-governing fund - with the largest single share of $41 billion coming from China - would consist of currency reserves held by the five nations' central banks.

The fund's main purpose is to shore up the finances of a BRICS member if it falls into crisis and could also "contribute to strengthening the global financial safety net", said South African President Jacob Zuma in March.

John Kirton, co-director of the BRICS Research Group at the University of Toronto's Munk School of Global Affairs, said the creation of the fund would be a "substantial step for the benefit of the BRICS and the global community beyond".

BRICS represents one fifth of the global GDP and has been the driving force behind the global economy in recent years. However, China's slowdown in growth has raised concerns among some experts. The US, the largest economy in the world which has been in recovery mode from the financial crisis, is facing the risk of a "disorderly exit" of easing monetary policy by the Fed.

According to the Washington-based Institute of International Finance, the slowing economic growth in emerging economies like China and India will end soon, but regaining momentum will be difficult.

Since Fed Chairman Ben Bernanke indicated that it may end the stimulus package after a policy meeting last Wednesday, global markets were shaken by the news. The Fed chief told reporters after the meeting that later this year the central bank would start reducing its bond-buying program to lower long-term interest rates - the so-called QE3 - if the economy improves as expected and would end the program by mid-2014.

The Fed has been purchasing $85 billion in Treasuries and mortgage-backed securities every month recently. Bernanke said the central bank would stop the buying when the unemployment rate dropped to 7 percent, which is unlikely to happen until next year.

Last September, Asian stock markets gained when investor confidence was lifted at the announcement of the QE3, which was expected to boost economic growth.

"Investors in emerging markets should actively follow Fed policies," said Goodman.

"QE undoubtedly helped to lift asset prices. So curtailment in the form of tapering can deflate emerging market asset values," Goodman added.

Xinhua contributed to the story.


(China Daily USA 06/25/2013 page2)