China Stocks Rallied on QE3 Launch, but Analysts Wary of Inflation

Chinese stock markets have rallied and commodities market risen， after the US Federal Reserve unveiled the third round of quantitative easing to boost the country’s economy. The Fed’s move might also help Chinese exports and cause an inflow of investment， but experts expressed concerns over whether the moves can help deliver sustained economic growth for the US and the world as a whole. They warned of risks of exchange rate fluctuation and higher inflation in China.

Third round of quantitative easing

The US Federal Reserve on Sept. 13 pulled the trigger of the third round of quantitative easing， known as QE3， which includes purchasing mortgage-backed securities “at a pace of $40 billion per month” starting September 14 until a marked turn is seen in the US employment outlook. And interest rates would keep at “exceptionally low levels” until at least through the middle of 2015， an extension of a half year from its previous decision.

The Fed has launched two rounds of quantitative easing since the global financial crisis struck in 2008， injecting more than $2 trillion in US Treasury securities and mortgage-backed securities， in a bid to stimulate the economy. But the country’s economic recovery was “obviously far from satisfactory，” said Fed chairman Ben Bernanke earlier in September， as the US unemployment rate still remained over 8 percent in August.

“We’re not promising a cure to all these ills， but what we can do is provide some support，” Bernanke said at a press conference on Sept. 13.

The moves triggered US stocks to surge， along with both crude oil prices and gold futures.

Although the effect of quantitative easing is decreasing， it is “still better than nothing”， said Qu Hongbin， chief economist on China with HSBC Holdings.

However， QE3 is more likely to boost growth “for a period” of time than provide longer-term support， said Yan Qingmin， assistant chairman of the CBRC.

“It’s irresponsible to the US， and also irresponsible to us，” Liu Mingkang， former chairman of the China Banking Regulatory Commission (CBRC)， told Bloomberg News.

The latest move was largely a result of “political considerations”ahead of the US presidential elections， Yan said. The country votes on Nov. 6. The global capital markets shouldn’t have overly high expectations for any boost from QE3， he added.

China stocks rebound

After the US Federal Reserve unveiled its anticipated QE3 program， China’s benchmark Shanghai Composite Index closed at 2，123.85 points on Sept. 14， up 0.64 percent; the Shenzhen Component Index gained 0.56 percent; and the stocks of Chinese Taiwan and Hong Kong tacked on 2.1 percent and 2.9 percent respectively.

“The positive response of investors demonstrates people’s expectations that the new round of bond-buying moves could help bolster the US economy，” Zhao Wei， director of the Institute of International Economics of Zhejiang University， told the Global Times， noting that if the world’s largest economy recovers， the global economy would go with it.

Li Xunlei， chief economist at Haitong Securities Co， said the extra Fed easing will draw hot money back to China from the US market. “This will push up China’s property prices and exert a simulative impact on the stock market，” he said.

Metal stocks rose obviously following a surge in their prices on hopes the Fed move will boost consumer demand.

Zijin Mining Group Co， the country’s largest gold producer， rose 3.3 percent to end at 4.03 yuan; Shandong Gold Mining Co gained 5.3 percent to 39.68 yuan; and Zhongjin Gold Corp jumped 6.7 percent to finish at 16.39 yuan.

Inner Mongolia Baotou Steel Rare-earth(Group) Hi-tech Co， China’s biggest producer of rare earth materials， added 2.2 percent to 35.49 yuan. Jiangxi Copper， China’s biggest producer of the metal， rose 3 percent to close at 23.13 yuan.

Chinese commodities markets rose

Chinese commodities markets rose in response to the latest round of monetary easing from the US Federal Reserve， capping a week in which key materials including iron ore and copper have gained amid optimism over possible Chinese stimulus measures， according to a Financial Times report.

Prices for rebar， a type of steel， rose 3 per cent on Sept. 14 for the most-traded January futures contract in Shanghai. Copper， a key ingredient in appliances and grids， was up 3.6 percent when the Shanghai Futures Exchange closed， a 6.5 percent gain for the week.

Analysts said the Fed’s decision to stimulate the US economy with quantitative easing would help improve confidence in the Chinese raw materials market but would have little impact on actual commodities demand from end-users.

“China isn’t really a beneficiary of QE3 so it doesn’t really change the domestic demand situation，” said Graeme Train， commodities analyst at Macquarie in Shanghai. “But the sentiment impact I think is important， because China has got to a position where it is pretty much destocked.”

Might help Chinese exports

Some analysts also expect the Fed’s move to help US families and boost consumption， which would be good news for Chinese exporters.

China’s export growth climbed only 2.7 percent year-on-year in August， with imports down 2.6 percent.

Meanwhile， China will face renewed pressure for its currency to appreciate， said Li Daokui， a former advisor to China’s central bank， during the ongoing 2012 Summer Davos Forum being held in north China’s city of Tianjin.

China’s yuan has shown a depreciating tendency since May as the country’s economic growth slowed and the U.S. dollar strengthened against the backdrop of the eurozone debt crisis.

“If the US economy recovers， it would certainly benefit China’s suffering exports. But for China， the key issue for its economic development is the domestic economy， not the external conditions，” said Gerry Rice， chief spokesman at the International Monetary Fund.

China’s economic growth slowed to a three-year low of 7.6 percent in the second quarter.

Premier Wen Jiabao noted on Sept. 11 at the Summer Davos Forum in Tianjin that there are “difficulties on our way ahead” in the country’s economy， but expressed confidence to overcome those difficulties and to “maintain steady and robust economic growth.”

Concerns over inflation

Many Chinese analysts expressed concern that the US dollars’flood in the coming years could cause prices to go up and drive up inflation in China.

China’s consumer price index rose 2 percent year-on-year in August after registering a 30-month low of 1.8 percent in July.

Xiang Songzuo， chief economist with the Agricultural Bank of China， said enlarged liquidity in Western financial institutions may increase foreign investment in China.

Prospects for a further slowdown in China led foreign direct investment to drop 3.6 percent year-on-year in the first seven months of the year.

Wei Liang， an analyst with the China Institutes of Contemporary Studies， said the effect of the quantitative easing accumulates month by month， and China will have to wait to see its full impact.

However， he warned， China’s foreign exchange reserve administrators should start bracing themselves against risks to China’s massive assets in the US dollar， and pay attention to possible increases in speculative money.

In Hong Kong， officials said on Sept. 14 they were concerned about the local housing market overheating following the US easing.

As the Hong Kong dollar is pegged to the greenback， officials cannot raise local interest rates to cool the property market. For the last few years， Hong Kong’s housing prices have surged because of low interest rates and an influx of money from the mainland.