'Bernanke shock' necessary

In bringing an end to its quantitative easing, US Fed needs to ensure it does not create global financial instability

Two weeks after the "Bernanke shock", the stock and currency markets have returned to a close-to-normal state. On June 19, when Chairman of the US Federal Reserve, Ben Bernanke, gave a clear signal the Fed would gradually reduce and ultimately quit its quantitative easing, $340 billion evaporated in the world bond market, and world stock markets tumbled.

However, the top concern for emerging economies, including China, is the outflow of capital. According to EPFR Global, which tracks cross-border capital flows, after the Fed initiated its third round of quantitative easing in September 2012, roughly $90 billion flew to the stock markets of emerging economies during the 17 weeks between Sept 1, 2012 and Jan 2, 2013, compared to only $15.9 billion during the whole of 2011. However, the trend had started to reverse even before the Bernanke shock, with a net outflow of $5 billion from emerging economies in the week ended June 5.