QE2' s end unlikely to ease China's inflation: economists

13:19, April 30, 2011      

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Despite the U.S. Federal Reserve's indication that it will end its massive bond-buying program, known as quantitative easing, or QE2, China's inflationary pressure is not likely to ease in the short term, said economists in Beijing.

Zheng Liansheng, a researcher with the Financial Research Center of the Chinese Academy of Social Sciences, a government think tank, said he expected the QE2 to end in time. However, because it remains to be seen when the Fed will begin to raise its bank interest rates, the upward trend in international commodity prices will definitely continue.

"Imported inflationary pressure on all other countries is still on the rise," he told Xinhua.

The Fed said in a statement released on Wednesday that it would finish its Treasury bond purchase program at the end of June as scheduled, as the U.S. economic recovery is "proceeding at a moderate pace." Despite this, interest rates will remain low for an "extended period".

The Fed launched its 600-billion dollar Treasury bond purchase program last November and has maintained ultra-low, near-zero key interest rates since then to help the economy grow stronger and to lower unemployment.

The Fed's statement is "ambiguous" on future possibilities of continuing a loose monetary policy, said Liu Ligang, Head of Greater China Economics with the Australia and New Zealand Banking Group (AZN).

"Since the U.S. core inflation rate is still at a low level, the Fed might not be considering the possibility of future rate hikes," he said.

The Fed is estimating a 1.3 to 1.6 percent increase in core inflation, according to Ben Bernanke, chairman of the Fed.

Economists warned that continuing the current monetary policy in the U.S. would keep its currency weak, which would in turn push up non-U.S. currencies and international commodity prices.

Earlier this month, Standard & Poor's, a key rating agency, dropped the long-term U.S. credit outlook from "stable" to "negative," while warning of spiking risks and public debt.

The Fed's quantitative easing policy has given rise to global inflationary risks and asset bubbles in emerging markets, which would ultimately post mid-term risks on the global economy, said Liu.

Soaring prices have already become a headache for the Chinese government, with China's consumer price index (CPI), a main gauge of inflation, hitting a 32-month high of 5.4 percent in March.

"Strong inflation would take a toll on China's economic performance, including bubbles in the capital market, property and art market," said Zheng.

The weakening U.S. dollar has, on the other hand, accelerated the appreciation of the yuan, China's currency, which has strengthened 61 basis points to a record high of 6.499 yuan per U.S. dollar. Since the beginning of this year, it has appreciated by 1.8 percent against the U.S. currency.

Liu said a stronger yuan could help to reduce imported inflation, as China depends highly on international commodities and is also seeing rising demand of agricultural product imports.

Tan Yaling, a financial expert, said the yuan is under pressure of a new round of appreciation if the U.S. dollar further weakens. But she said that China's economy fundamentals cannot support a fast rise in yuan. This would put tremendous pressure on Chinese exporters, which have already suffered from surging production costs.

Liu said he expected that the yuan's exchange rate will be one of the important issues discussed during the third round of China-U.S. Strategic and Economic Dialogue, which will occur next month in Washington.

Source: Xinhua
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