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Speed up structural changes

By Zhou Junsheng (China Daily) Updated: 2012-12-19 08:09

US Fed's fourth round of quantitative easing will add further pressure to China's export-oriented enterprises

The Federal Open Market Committee, a monetary decision-making body within the US Federal Reserve Board, announced on Wednesday, after a two-day meeting, that the benchmark interest rate of 0 to 0.25 percent will remain unchanged if unemployment in the United States stays above 6.5 percent.

It also launched a new, open-ended $45 billion a month purchase of Treasury bonds to replace the expiring "Operation Twist". Together with the $40 billion mortgage-backed securities purchase-quota laid out in QE3, that will bring its total quantitative easing asset purchases to $85 billion a month.

The latest round of quantitative easing, QE4, came just three months after QE3 was lunched. This demonstrates the US economy has failed to recover as expected and the Obama administration has no better options to deal with the struggling economy and high unemployment rate.

The Obama administration faces a range of problems involving "fiscal cliff" negotiations in the coming year as "Operation Twist" comes to an end. The latest data show that unemployment in the US is still high and there are no signs of a substantial economic recovery. Due to the Republicans' fierce opposition to raising taxes on the wealthy, the Obama administration has lowered its tax revenue demand by $200 billion as a compromise. Under these circumstances, QE4 is viewed as a stimulus that can help maintain the previous momentum of liquidity injection.

The Fed chose to inject liquidity into the market with QE1, adopted in September 2008, and lowered short-term interest rates in QE2, which began in November 2010, both of which were tantamount to increasing dollar issuance. However, QE3, which was launched in September, and the newly announced QE4, purchased assets as a way to bring down long-term interest rates and bolster the reeling mortgage-lending market.

However, the positive effects brought about by the three previous rounds of quantitative easing have been on the wane. Instead, the side effects are becoming more noticeable. While they increased liquidity and improved the US' domestic credit structure in the short run, they have offered more opportunity for speculative capital to maneuver. This explains why the prices of stocks and commodities have witnessed a robust rebound every time a new round of quantitative easing has been launched. Due to the lack of effective measures to monitor the flow of funds, the increased liquidity is likely to push prices higher, further adding pressures to those enterprises that are cost sensitive.

Due to the US' special status in the global economy and the leverage role of the US dollar in the international monetary market, the Fed's continuing policy of quantitative easing will inevitably have significant effects on the global market. Following the adoption of QE3 in September, European countries, Japan and other major economies successively introduced their own monetary easing, which severely dented the nascent recovery of the global economy. In the wake of QE3, the yuan, has sharply risen in value, which has had extremely unfavorable effects on China's struggling foreign trade sector, as indicated by its lower-than-expected export growth in November.

In the context of a lingering global economic slowdown, a new round of quantitative easing by the Fed is very likely to prompt other central banks to follow suit and inject further liquidity into the market, which will inevitably aggravate the risk of a new round of inflation.

China's economy has been on a stable trajectory because of the adoption of a series of timely macroeconomic measures by the government. However, some of its economic structural problems have not been completely eradicated and the foundations for its economic recovery are not yet firm. In particular, the country has not completely extricated itself from excessive dependence on foreign trade because of insufficient domestic demand. The continuing dollar depreciation against the yuan following the launch of the Fed's successive rounds of quantitative easing has further added huge pressures to China's export-oriented enterprises.

Despite facing mounting calls for them to loosen its monetary policy to support fund-hungry small and medium-sized enterprises, the Chinese authorities should remain particularly wary of the increased possibility of inflation following the new round of quantitative easing in the US.

In the face of the complicated economic situations at home and abroad, China should develop mature market regulatory tactics and maintain a calm attitude toward slower economic growth. More importantly, it should race against time to accelerate transformation of its economic structure in a bid to create good conditions for effectively fending off outside risks.

The author is an economics commentator based in Shanghai.

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