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27 Jun, 2012

Chinese Experts: U.S. Economy Cannot Survive on “Cardiac Stimulants”

Source: People's Daily Overseas Edition, Author: Luo Lan

Beijing, June 25, 2012 (People’s Daily Online) — The market is paying extremely close attention to the question that whether the United States will launch a third round of quantitative easing (QE3) soon. The Federal Reserve is still holding the conference, but the market’s anticipation on the QE3 has strengthened. On June 19, the three major stock indexes of the United States all went up. The Dow Jones Index rose by 0.75 percent, the NASDAQ Index rose by 1.19 percent and the Standard and Poor’s 500 Index rose by 0.98 percent.

On June 19, prices of base metals of the London Metal Exchange (LME) almost all went up, and the LME Copper Index rose by 0.52 percent.

“Recently, the market’s anticipation on the QE3 is very obvious,” Zeng Gang, director of the Bank Research Office under the Institute of Finance and Banking (IFB) under the Chinese Academy of Social Sciences (CASS) told People’s Daily.

“Although there are almost no positive factors, U.S. stock markets have risen successively for several trading days. It indicates that the people generally believe that the U.S. Federal Reserve will launch the QE3.” Zeng added that launching the QE3 is necessary for turning back the poor market confidence.

QE3 may be launched in a secret way

Although the people’s anticipation on QE3 is strong, it is still uncertain whether the United States will launch it together with major central banks of the world or not.

According to Zeng’s analysis, the economic situation of the United States is relatively not bad compared to these of other countries and therefore does not need to launch an economic stimulus policy urgently.

Zeng went on to explain that the unemployment rate of the Europe has reached between 10 percent and 20 percent, but it is only about 8 percent in the United States. Not long ago, the yield rate of the U.S. treasury securities reached the lowest level in history, and therefore, there is no need for the United States to launch the QE3. However, the G20 requires the whole world to fight against the economic depression jointly and save Europe, and therefore, the United States’ monetary policy will still have a loosening trend but will not be as loose as the past.

The United States may launch its economic stimulus policy in a more hidden and secret way, Zeng said. “The economy cannot rely on morphine every day. In the long term, QE3 cannot solve the fundamental problem,” said Zeng. “Any monetary policies can at the most prevent further deterioration of the economic situation and grant it a reprieve like a shot in the arm. But treatment of illness cannot rely on such cardiac stimulant alone.”

Zeng said that the countries still have to carry out economic restructuring as a long-term approach. Solution of the economic problems cannot rely on morphine every day, and too frequent relief measures may not be beneficial to the economic structural adjustment.

In fact, the first two rounds of quantitative easing not only failed to solve the current systemic and structural problems of the U.S. economy as a whole, but also had a negative impact on the global economy.

Yan Xiaona, associate director of the Research office of Finance and International Economy under the IFB under the CASS, believes that the Fed’s quantitative easing policy will lead to further U.S. dollar depreciation.

Yan said that when the United States launched the quantitative easing policies, the exchange rates of U.S. dollar against almost all currencies devalued significantly in the foreign exchange market, especially against Asian currencies such as yen, won, Thai baht, and Malaysian ringgit, which had a serious impact on the economic operation of these countries. Japan, Korea, India, Russia and other countries had no choice but to intervene in currency markets to prevent the continuous sharp appreciation of local currencies.

At the same time, along with the further depreciation of the U.S. dollar, bulk commodity prices have ushered in a new round of upward pressure, resulting in a rise in global inflation expectations and intensifying the instability and uncertainty in the future trend of the global economy, Yan said.

Zhao Beiwen, researcher at Shanghai Academy of Social Sciences Institute of World Economy suggested that in case the United States launches the third round of quantitative easing policy, China must closely monitor against large-scale inflows of international “hot money;” maintain the stability of the nominal interest rate and avoid further expansion of arbitrage space; further strengthen foreign exchange reserve management and diversify foreign exchange reserve as soon as possible; and accelerate the pace of exchange rate mechanism reform of the yuan to implement the internationalization process of the yuan step by step.

Read the Chinese version at: 美国又想打“量化宽松”强心针?,