Ahead of G20, China urges caution in Fed policy tapering

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.

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 tapering off 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 US - 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.

Financial markets are fretting that the US Fed might decide to reduce its monthly bond buying when it meets on September 17 and 18.

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 per cent this year - in line with the government's target.

The 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 September 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 minimise 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.

"It will not exceed 50 per cent," he said.

The BRICS' leaders have agreed to set up the fund to help ward off currency crises.