WB scenarios for end of taper show China little affected

LONDON - A series of scenarios modelling the taper of the United States quantitative easing (QE) program carried out by the World Bank show that China is little affected, according to a report published Wednesday.

The announcement of tapering of the QE program has not been disruptive, Andrew Burns, acting director of the World Bank's economic prospects group and lead author of the twice-yearly Global Economic Prospects, said at a press conference in London.

Burns said, "It is reassuring that since the announcement of tapering by the Federal Reserve, we have had very little volatility in capital markets."

Burns said the report looked at what would happen to capital flows to developing countries if long-term interest rates in the US were to jump up by 100 basis points in response to QE.

"If that were to occur it would be disruptive, and we would see a decline in capital flows to developing countries by as much as 50 percent for a short period of time," he said.

"What that rapid rise in interest rates does is compress the time that capital markets adjust, cause a relatively large portfolio adjustment that lasts for a few months and then things return to normal."

The second scenario considered was a rise of 200 basis points in long-term US interest rates which could result in flows to developing countries falling by as much as 80 percent over a relatively short term.

"GDP impacts are significant, about 0.7 to 0.8 percent income for middle-income GDP over two years, equal to a 0.4 percent reduction in their growth rate," said Burns.

He added, "In the much less likely 200 basis points scenario, it would be 1.3 percent of middle income GDP, a reduction in growth rates of 0.6 percent."

"Impacts are larger in East Asia and the Pacific, excluding China, in developing Europe and central Asia and in sub-Saharan Africa," said Burns.