No QE needed for China despite downward pressure on economy: US expert

WASHINGTON - There's no need for China to launch quantitative easing (QE) despite downward pressure on the world's second-largest economy, a US expert said.

China is in "a very different position" compared with the United States, United Kingdom and other countries engaging QE, Nicholas Lardy, a senior fellow at the Washington-based Peterson Institute for International Economics (PIIE) and a leading expert on China's economy, told Xinhua on Thursday.

"I think this idea that China is engaging QE is completely misunderstanding," said Lardy, dismissing the speculation that China is considering the use of unconventional monetary measures, adopted by major central banks in advanced economies, to boost liquidity and promote growth.

QE is a set of unconventional policy measures used when policy rates are close to zero and the real economy faces recession. The US Federal Reserve has resorted to several rounds of QE since the recent financial crisis to stimulate the economy after cutting benchmark interest rates to near zero.

"China has a lot of instruments left" in terms of market operations, required reserve ratio and interest rates to revive its economy, Lardy said. "China's interest rates are nowhere near the zero lower bound. They can cut (interest rates) by 25 basis points every day for several weeks before getting to zero."

The People's Bank of China (PBOC) cut the benchmark deposit and loan interest rates by 25 basis points starting from May 11, the third rate cut in six months. After the move, the one-year deposit rate stands at 2.25 percent, and the one-year lending rate at 5.1 percent.

Lardy said there's also "plenty room" for China cutting the required reserve ratio, which stands at 18.5 percent for major banks at present, still high by global standards.

It was "very normal" for China to have a required reserve ratio of 6 percent about a decade ago, Lardy recalled, adding that the ratio jumped to as high as 21 percent in recent years as part of the central bank's sterilization program involving foreign currency operations.

Looking forward, Lardy expected the required reserve ratio to be gradually scaled back to "single digit."

Lardy said people are talking about China's own version of QE maybe because the central bank has said it will accept local government bonds as collateral in its lending operations. In fact, China's central bank will not buy these bonds in the primary markets, so it cannot be characterized as QE, he argued.

The Federal Reserve, the European Central Bank and the Bank of England all expanded eligible collateral long before launching QE, said Jacob Kirkegaard, a senior fellow at the PIIE.

"It doesn't involve actual asset purchases. It involves potential balance sheet expansions. That's a big difference," Kirkegaard told Xinhua.

The latest PBOC policy report for the first quarter also ruled out the need to use QE to inject liquidity into the market, saying China has ample room to use various monetary tools to effectively manage and supply liquidity.

China's economy expanded 7 percent in the first quarter, down from 7.3 percent in the previous quarter and the lowest quarterly growth since 2009, but outpacing most major economies.

Lardy said China's economic slowdown, mainly driven by a large slowdown in property investment, actually is "a positive development." It will put China on "a path of more sustainable growth" that is more driven by consumption expenditures rather than excessive investment, he added.