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【Beijing Forum 2010】Possible Measures against US Fed's QE Policy

Peking University, Nov. 7, 2010: On the afternoon of Nov. 6, the panel session themed “Global Imbalances and Their Solutions” of Beijing Forum 2010 was held in Yingjie Overseas Exchange Center, Peking University (PKU). Prof. Huang Yiping from PKU National School of Development delivered a speech titled “The US Can’t Win in a Currency War,” suggesting possible measures that China can take against the Fed’s quantitative easing (QE) policy.


Prof. Huang began the speech by analyzing the current status of international economy. After the financial crisis, the US adopted loose monetary policy and depreciated US dollars to stimulus its economy. Recently the Fed is again adopting QE policy, pumping money directly into the market. China’s export will suffer and the US might benefit from increase of export and decrease in government’s debt, but something far more dangerous can occur: the economic bubble.


In the early 1990s, when the Fed adopted loose monetary policy, which caused lots of investor to buy US dollars and then invest in Eastern Asia, resulting in the prosperity of the local economy, thus the bubble. When in 1996 the Fed shifted to tight monetary policy, these bubbles broke which resulted in the financial crisis in Asia starting from 1997.


History is likely to repeat itself with the QE policy the Fed is taking up. The question is: where the bubble will be? Not in the US but most likely, the bubble will occur in emerging economy and possibly China. China has to do its utmost to prevent the bubble appearing in its homeland. What we can do is quite easy: raise the exchange rate and interest rate of RMB at the same time to limit the inflow of hot money. There’s lesson to be learned from Japan. In 1985 when Japanese currency Yen appreciated against US dollars, Japan lowered its interest rate to ease the pressure on appreciation. It didn’t work out since much hot money found the way into the housing market and boost the market to the extent of an asset bubble, which eventually caused the economic crisis. To constrict the inflow of hot money, China should raise its interest rate, which can lead to the decrease of asset prices so as to discourage hot money. In addition, setting restrictions on short-term hot money is also a possible way to defend China against the “bubble.”


Prof. Huang believed in capital liberalization but said at this moment, capital control is as necessary as building a great wall. However, capital control should not be done in just one step but gradually and Prof. Huang emphasized that the capital control is “only temporary.”


Other scholars found Prof. Huang’s argument quite cogent and interesting. They went on to ask him about his views on related issues such as the effectiveness of the capital control measures, and their possible impacts on other Asian and European countries. “As long as we increase the transaction cost, we’ll be effectively limiting the inflow of hot money though we cannot stop it totally,” Prof. Huang responded. “China suffering from economic crisis is the least we want to see and it certainly does not benefit the world. Admittedly, the measures that China may take will affect other countries, but first and foremost we should obstruct the bubble from occurring in China.”


Prof. Huang opposed to the idea of building up some kind of Asian alliance to appreciate currencies together against US dollars so as to cut down the negative effects otherwise. He pointed out that it is difficult for countries with different status to sit down and negotiate how much each country should appreciate its currency, and will be quite dangerous since it’s shifting the mechanism of the market to the governments. Actually the alliance is not even necessary: countries will adopt policies best for their own. If some measure if good for them, they will just do it. It’s true that other countries might follow China’s footsteps to control capitals, but no one is sure of the consequence, which possibly might stop the Fed from printing money.


After the meeting, when asked about whether the “bubble” is inevitable or not, Prof. Huang referred to history again as firm evidence, “When hot money comes in they go for the asset markets, housing and stock markets in particular. These may help boost fixed asset investment to some extent but would likely lift asset prices, which could again encourage speculative activities. This was what happened in Japan after 1985 and East Asia in the early 1990s. And if the Fed continues with QE policy, the next bubble is inevitable, most likely in emerging market economies, possibly China if we are not careful. True, Europe needs more investment, but who wants to invest in Europe today?”



What is quantitative easing (QE)?

Usually, central banks try to raise the amount of lending and activity in the economy indirectly, by cutting interest rates. Lower interest rates encourage people to spend, not save. But when interest rates can go no lower, a central bank's only option is to pump money into the economy directly. That is quantitative easing.



Reported by: Chen Long

Edited by: Jacques