MercoPress. South Atlantic News Agency

China and emerging economies call on the Fed for prudence in unwinding stimulus

China's Deputy Finance Minister Zhu Guangyao and central bank Deputy Governor Yi Gang

The US Federal Reserve must consider when and how fast it unwinds its economic stimulus to avoid harming emerging market economies, senior Chinese officials said on Tuesday. Financial markets are uneasy because the US Fed might decide to reduce its monthly bond buying when it meets on Sept 17 and 18.

The warning by China's Vice Finance Minister Zhu Guangyao and central bank Vice Governor Yi Gang came as economies from Brazil to Indonesia struggle to cope with capital flight as US interest rates rise ahead of an expected slowing down in the Federal Reserve's bond buying program that unleashed liquidity across the world.

“The US economy is showing some positive signs and is recovering gradually and we welcome this,” Zhu told a briefing ahead of G20 leaders' summit in Russia next week.

“But the United States - the main currency issuing country - must consider the spill-over effect of its monetary policy, especially the opportunity and rhythm of its exit from the ultra-loose monetary policy,” Zhu said.

Zhu said while China faced a severe economic environment at home and abroad, it would keep economic policies stable.

China will refrain from providing stimulus to the world's second-largest economy, which he said was on track to grow around 7.5% this year - in line with the government's target.

The Chinese government will instead quicken structural adjustments, including efforts to deal with factory overcapacity, he said.

Speaking at the briefing ahead of the G20 meeting in St Petersburg on Sept 5 and 6, Vice Governor Yi Gang said the issue of how nations would cope as developed economies tighten their monetary policy would be a focus at the G20 meeting.

”On monetary policy, the focal point (of G20) will be on how to minimize the external impact when major developed countries exit or gradually exit quantitative easing, especially causing volatile capital flows in emerging markets and putting pressures on emerging-market currencies,“ Yi said.

Yi said a 100 billion foreign-currency fund being discussed by countries that make up the BRICS grouping of Brazil, Russia, India, China and South Africa will be set up in the foreseeable future. He said China would provide ”a big share” of the funds but he did not give details.

However US analysts believe September will bring no surprises but towards the end of the year there could be changes. For one Bernanke next January will be stepping down from the Fed after eight years in the helm and sometime in mid October the US national debt will reach a ceiling.

At that point the Obama administration will have to sit down and negotiate a deal with the Republicans, and a big debilitating political fight can be expected.