OPINION

Emerging Markets Will Be Hurt by the End of QE

At the recent central bank governors' meeting, a debate was launched over the Federal Reserve's possible end to quantitative easing (QE). The Fed simply turned a deaf ear to voices concerned about the impact on emerging markets. The QE adopted after the 2008 global financial crisis will come to an end, which will exert a deep influence on the global economy, the financial market, the pattern of international capital flow, and emerging economies in particular.

Reviewing history from the 1980s to 2007, moments of crisis in emerging countries were closely linked to policy changes by the Fed, and every time it shifted to tight monetary policies, a crisis would break out in emerging economies. Since the Fed started the unconventional QE, developing countries have benefited a lot from a global liquidity surplus, because they are characterized by higher economic growth, higher risk premium and greater currency appreciation potential.

While the Fed constantly prints money, liquidity would flood into emerging economies, which leads to currency appreciation, domestic credit expansion and intensified inflation; if the Fed raises interest rates, emerging economies would be confronted with capital flight, plummeting of exchange rates, liquidity crunch and the shrinking of asset prices, resulting in sharp fluctuations on financial markets.

In 2013, China's economy entered a phase of transformation. Economic growth is slowing down; industrial demand is gloomy; the investment-driven growth model is no longer sustainable; the appreciation of the yuan has led to higher export pressures; and the real estate market keeps booming. In the economic restructuring process, China is facing great challenges. The Fed's decision will have both short- and long-term impacts on China's liquidity and monetary policies.

First, capital outflow may lead to tight liquidity of domestic capital. Considering the key role of the U.S. dollar in global liquidity, once the Fed begins to reduce its monthly securities purchase program, a falling monetary base would result in a back flow of international capital, and China's capital pool would decline.

Second, if the expectation for yuan depreciation increases, a liability risk would mount. Although China holds large amounts of foreign exchange reserves, and current account surplus will not change in the short term, it doesn't necessarily mean there is no expectation for yuan depreciation. Amidst the subprime crisis and the euro zone sovereign debt crisis, such an expectation resurged in the overseas market at one time.

In future, if capital flees emerging markets on a large scale, the expectation may return again. If unilateral expectation for yuan depreciation lasts too long, domestic enterprises will witness an increase in foreign currency assets and yuan-denominated debt, and domestic households may take the U.S. dollar as a deposit currency. This will present a challenge to liquidity supply and asset prices on the domestic market, and dampen the confidence in China's economy.

Third, some raw material sectors will face greater pressures. The Fed's exit of QE will push down international commodity prices, which will affect the profits and production of domestic commodity makers. On the other side, the fall in the price of imported commodities will intensify domestic competition.

In short, China needs to buffer the impacts of the QE exit in terms of interest rate policies, monetary policies and capital controls, and speed up its economic restructuring.

This is an edited excerpt of an article by Zhang Monan, an associate researcher with the State Information Center, published in Securities Times

THE MARKETS

Back to Profit

Struggling retailer Gome Electrical Appliances Holding Ltd. was back in the black during the first half of the year, amid a restructuring plan by the brick-and-mortar retailer to expand its e-commerce business.

The Chinese company, which is backed by private equity firm Bain Capital, said in an unaudited earnings flash on August 28 that it posted a 322 million yuan ($52.25 million) profit in the January-June period, as costs went down and its margin widened.

The company said that a fierce price war waged by online retailers, including jd.com, cost it 607 million yuan ($99.18 million) in the first half. Last year was the first time that Gome lost money, after it went public nine years ago.

The turnaround comes after it shut low-performance stores, cut costs and started a plan to go digital. Gome plans to build up its e-commerce business and create synergies with its brick-and-mortar stores.

A New No.1

Evergrande Real Estate Group Ltd. replaced China Vanke Co. Ltd. in the first half of this year to become the country's largest property developer by sales value.

The Guangzhou-based company's revenue rose 13.3 percent to 42 billion yuan ($6.86 billion) in the first six months. Its net profit rose 15.8 percent to hit 6.5 billion yuan ($1.06 billion), about 1.4 times that of Vanke.

Vanke has long been the country's largest developer by sales.

Evergrande's earnings rose after the company raised prices in April and sold the most properties, by area, among Chinese developers in the first half of the year, according to China Real Estate Information Corp. 

NUMBERS

3 tln yuan

Profits from industrial enterprises with a sales revenue of more than 20 million yuan ($3.15 million) from January to July, a 11.1-percent year-on-year increase

27

Number of industrial sectors that witnessed higher year-on-year profits from January to July

73.5%

Year-on-year increase in profits of the power and heat generation sector from January to July

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