Business Times: Fri, Aug 31
THE next round of quantitative easing (QE) appears closer than ever - and this time China may welcome it.
When the US Federal Reserve first embarked on the strategy two years ago to kickstart growth, it unleashed a cascade of hot money that created an asset bubble in China. QE was seen as bad news as the Chinese government fought to deflate the bubble.
Now QE3 - the next round of monetary stimulus - seems to be on its way, and Chicago Federal Reserve Bank president Charles Evans can expect a more receptive audience in Beijing. He spent the last week in China touting the merits of QE3 to Chinese officials, and it's obvious things have changed on the ground.
Mr Evans spoke to BT against the backdrop of talk that the benefits of QE3 to China outweigh its shortcomings.
Earlier this week, Peng Wensheng, chief economist at China International Capital Corporation, the country's top investment bank, argued in a report that the overall impact of QE3 for China would be positive.
It will help Beijing strike a delicate balance between maintaining growth in macro-economy and stabilising the housing prices, he concluded.
His rationale envisions a scenario in which QE3 will boost US domestic demand that, in turn, helps arrest the steep fall in China's exports to the United States.
Its side-effects of forcing capital inflows into emerging markets as a result of the credit-easing binge will be greeted this time as a boon, as it would help slow the pace of capital outflows that China is experiencing, exactly a reversal of events played out two years ago.
The cooling of inflation in China now also means QE3 is less likely to create a large asset bubble. Besides, QE3 would be a less blunt instrument in stabilising domestic real estate market than having China embarking on its own monetary easing, Mr Peng said.
Just yesterday Bill Gross, who runs the world's biggest bond fund, said in an interview that he expected QE3 "relatively soon".
Speaking at the Hong Kong Bankers Club earlier this week, Mr Evans also indicated that the US needed to boost growth and that its interests were more aligned with China's now than in 2010.
He highlighted the fragile state of the US economy, saying "at the moment economic growth is not much above stall speed. Another negative shock could send the economy into recession. And if a recessionary dynamic takes hold, it would be especially difficult to regain momentum".
A China hard landing, he elaborated afterwards, would be unhelpful to this development.
Mr Evans said he expected the US unemployment rate to stay above 7 per cent until 2015, from its current level of 8.3 per cent, if a QE3 was not forthcoming. He is lobbying for the Fed to make an explicit commitment to its stimulus package.
"I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 per cent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation," he said.
The markets are awaiting a speech this weekend by Fed chairman Ben Bernanke in Jackson Hole, Wyoming for clues.
Another way that China could benefit from QE3 is by shifting its exports back from the ailing Europe market to the US, just as it increased export orders to Europe in the immediate aftermath of the US financial crisis, according to Stuart Leckie, an investment actuary at Stirling Finance.
"Quantitative easing will stimulate US economy, stimulate imports from China. And there should be beneficial effects for China," he says. The US and the euro area account for about one-third of China's merchandise exports.
Chinese analysts were also betting that QE3 would provide a facelift to China's domestic stock market, even though the effect was not expected to be as powerful as before.
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