QE2 Was Bad News For China, But QE3 Will Be Great

China drums

Photo: AP Images

The Fed’s second round of quantitative easing (QE2) announced in 2010 was widely blamed for inflation in China.Now that the Fed has announced unlimited quantitative easing, many are worried about similar impacts this time around.

But Bank of America’s Ting Lu writes that China has more to gain from this round of QE than it has to lose.

  1. Chinese manufacturers could increase their inventories, after destocking for many months. The raw material inventory sub-index of Chinese PMI has been below the contractionary level of 50 for 16 months.
  2. Potential home buyers might purchase homes on expectations that home prices could appreciate in the future. This in turn would strengthen home sales and housing starts.
  3. Concerns that the renminbi would depreciate against the U.S. dollar “will almost certainly be alleviated” and reduce chances of capital flight.
  4. A recovery in the U.S. would boost Chinese exports and foreign direct investment.

Moreover, Lu writes that concerns about inflation and hot money flows are misplaced because producer price inflation is currently negative, and because consumer prices are below the 4 per cent target. He also thinks recent inflation has been driven by China’s own money growth.

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