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U.S. QE3 could affect yuan appreciation, inflation

(Xinhua)

08:11, September 14, 2012

TIANJIN, Sept. 13 (Xinhua) -- A possible third round of quantitative easing (QE3) in the United States may stimulate growth but also increase pressure concerning the appreciation and inflation of the yuan, according to economists.

China will face renewed pressure for its currency to appreciate, although its exporters will benefit somewhat from stronger demand in the United States if QE3 is rolled out, said Li Daokui, a former advisor to China's central bank, during the ongoing 2012 Summer Davos Forum being held in north China's city of Tianjin.

China's yuan has shown a depreciating tendency since May as the country's economic growth slowed and the U.S. dollar strengthened against the backdrop of the eurozone debt crisis.

In the case of QE3, more speculative capital will flow into China over market expectations for a stronger yuan and relatively lower inflation in the country than in the United States, Li told reporters.

Investors are waiting for coming decisions by the U.S. Federal Reserve on a possible stimulus after a two-day policy meeting ends on Thursday. Many analysts expect the Fed to announce the stimulus to counter weak economic recovery and job losses.

"QE3 is necessary for the U.S. economy in the short-term, but cannot solve its fundamental fiscal problems," Li said.

Zhu Min, deputy managing director of the International Monetary Fund, said QE3 is acceptable, as stabilizing economic growth will be important.

However, monetary easing may lead to excessive liquidity, which can have a global impact, he said.

"We have discussed with U.S. authorities the issue of soaking up liquidity in the future while conducting monetary easing," Zhu said.

"Because growth is slow now, overall inflationary pressure is not high. But we have to think about what impact it will have if the situation changes," he said.

Since the onset of the financial crisis, the U.S. Federal Reserve has completed two rounds of quantitative easing, known as QE1 and QE2.

It has bought more than 2 trillion dollars in U.S. Treasury securities and mortgage-backed securities, expanding its balance sheet to around 2.9 trillion dollars.

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