US easing spurs inflation fears

As US Federal Reserve chairman Ben Bernanke suggested further monetary easing was on the way, economists warned that this could lead to higher inflation and dilute the value of China's foreign currency assets.

The warning came as China's monetary authorities are taking steps to prevent an asset bubble as economic growth picks up speed.

Bernanke told the Senate Banking Committee on Tuesday that the Fed initiative in bond purchases is creating a stronger recovery at home and "mutually beneficial" results for other countries.

"If all the major economies that need support provide stimulus and extra aggregate demand, that's mutually beneficial. For example, China depends on the strength of Europe and the US as its export market. This is a positive-sum game, not a zero-sum game," Bernanke said.

However, Zhang Yongjun, deputy director of the Economic Research Department of the China Center for International Economic Exchanges, a leading think tank, said Bernanke's remarks were only an excuse for a policy that may bring a "disastrous aftermath" to emerging economies.

"Although the short-term boosting of US demand for exports may benefit production growth in China, rising liquidity will pose a challenge," Zhang said.

China's currency rose for a fourth day on Wednesday influenced by Bernanke's defense for continually increasing the dollar supply.

The People's Bank of China raised the yuan's reference rate for a second day, strengthening it by 0.02 percent to 6.2842 to the dollar.

Zong Liang, deputy head of the international finance research institute of the Bank of China, said that the appreciation pressure on the yuan in the coming months may be mainly from the outside.

The Fed currently purchases $85 billion in bonds every month, and there will be no clear termination signal unless it sees a substantial improvement of the employment situation, Chinese economists said.

Since the financial crisis broke out in 2008, the Fed has launched three rounds of quantitative easing in which it increased the money supply by buying Treasury bonds and certain mortgage-backed securities. This has involved more than $2.5 trillion so far, and slashed the interest rates to effectively zero. In September 2012, the Fed launched the third round, dubbed QE3.

Lawrence Goodman, president of the Center for Financial Stability, a New York think tank, called QE3 "a bet being waged over time".

Such a monetary policy aimed at domestic objectives benefits China in the short term, by helping to keep the global economy afloat. But "distortions in financial markets related to this untraditional monetary policy can prove to be a substantial cost in the future," he said.

Contact the writers at chenjia1@chinadaily.com.cn