Exercising caution amid QE4

China may adopt a prudent monetary policy in response to possible currency appreciation resulting from the fourth round of quantitative easing, or QE4, by the United States, experts said.

The US Federal Reserve on Wednesday said it will launch its latest quantitative easing measures, committing $45 billion a month to buy long-term Treasury securities to replace Operation Twist, which expires at the end of the year.

Operation Twist is a monetary policy in which the Fed buys and sells short-term and long-term bonds depending on their objective.

Along with Washington's round of QE3, which committed $40 billion a month to buy mortgage-backed securities, the total monthly bond purchases by the Fed will amount to $85 billion a month.

The Fed will hold interest rates to near zero until the US unemployment rate falls below 6.5 percent and said it expects to keep rates low as long as its inflation forecast stays below 2.5 percent.

Louis Kuijs, chief China economist with Royal Bank of Scotland, said QE4 was in line with the easing policy stance followed by the Fed, and such a stance of low interest rates and high liquidity will not stop even when this round of quantitative easing is over.

"It will only be one step in a series of easing measures," he said, explaining that such measures will generate capital inflow for Asia and China in particular, which is likely to mean added pressure to China's current account balance and international payments.

He said the yuan will continue to appreciate against the dollar because of QE4, although the trend is also partly a result of a rising currency value backed by the country's increasing production capacity.

Kuijs' opinion was echoed in a survey of 100 economists by 163.com. Fifty-four 54 percent of the respondents said the yuan exchange rate will rise against the dollar in 2013 - nearly seven times the percentage projecting a depreciation.

Guan Qingyou, a senior researcher with Minsheng Securities Co Ltd, said QE4 will not have a great effect on the Chinese market as it has been much anticipated.

However, he said it adds pressure to China's policymakers, who need to support steady growth while guarding against a possible rise in housing prices.

"We should maintain the continuity of our macro policies ... monetary policy needs to be prudent, but not too stringent."

(China Daily 12/14/2012 page13)