QE3 will do little to help China
Updated: 2012-09-27 11:22
By Zhou Feng (China Daily)
Since the United States announced the launch of the third round of quantitative easing policy, or QE3, earlier this month, many analysts in and outside of China have come to believe it will be favorable to the Chinese export sector.
Their reasoning looks sound: the policy will pump $40 billion every month into the economy by making asset purchases. With the injection, US businesses and households will find it much easier to get loans, and with convenient access to capital, production and consumption will surely come back. As the US is one of the largest foreign markets for Chinese goods, a rebound in US consumption will, of course, increase China's exports.
But will this become true? I see the opposite.
The reasoning given by the QE3 supporters has three links.
First, QE3 will boost liquidity in the market. Second, the liquidity will spur production and consumption. Finally, a US consumption boom will leave Chinese exporters with more orders.
I do not question the first and last parts, but the second part is totally wrong.
To understand this, we must know why the US economy has become sluggish in the past few years.
The US' economic woes, which were triggered by the subprime mortgage crisis, are due to a structural problem. The economic slowdown in the US is caused by two factors.
The nation, including its people, had spent too much in the past decade, thanks to fast credit growth and the US dollar's low value, reinforced by the currency's status as a global reserve unit.
The US economy experienced relatively fast growth in the 1990s and has slowed down since the turn of the century. But still, in the first few years of this century, the country managed to stay afloat by maintaining consumption and production through extending loans. With the easy credit, US people spent lavishly on a wide range of goods, including houses.
But that consumption boom went beyond the means, and the sub-prime crisis happened after many US homebuyers were unable to repay their debts. Since then, the whole nation has been repaying the debts accumulated in the past decade.
Therefore, its people will only regain the confidence to spend after the nation has repaid those debts. Until then, consumption will continue to lose steam.
The other reason why the US is not doing well is that its economy is in a cyclic low, waiting for the next round of technological innovation to improve production efficiency and create new demand and greater consumption.
Each time the US enjoyed a long period of fast growth, there was a major technological advance behind it.
The last time was in the 1990s when Internet technologies began replacing old ways of communication, and so created new engines of growth. Other similar historic growth engines include the wide use of electricity, the railways and the electronics revolution.
But now the US is short of an engine, and is looking for one. New energy could provide the next boost, because in replacing traditional energy, construction of facilities and systems will certainly bring a boon to production and consumption. But it will take time for the new energy industry to take shape.
While the US alleviates the pains caused by overspending and waits for a strong growth engine to arrive, its economy cannot fare well. The problems haunting the US economy have nothing to do with liquidity. In fact, the loan rates in the US have been ultra-low and the market has not been short of capital in the past two years.
So even with QE3 in place, the US economy won't pick up. Therefore, expecting QE3 to salvage Chinese exports is not realistic.
Instead, QE3 is likely to have an adverse effect on China's exporters.
Since the US is free for capital flows, if the excessive liquidity boosted by QE3 cannot be absorbed domestically, it will flow out of the nation to seek gains.
China, as the only major world economy that still maintains a relatively fast growth rate, is likely to be a destination of US capital. The influx of money will add pressure to inflation in China and cause the Chinese yuan to rise against the US dollar.
Inflation will add costs to Chinese production, further weakening the price competitiveness of Chinese exports, while a stronger yuan will prompt global buyers to leave China to seek cheap goods elsewhere.
QE3 will also result in rising international commodity prices, as capital will seek security in commodities to cushion the loss incurred by a weak dollar.
A rise in commodity prices will vex Chinese exporters, because they are not capable of passing the upstream costs onto end users.
Overall, there is no reason for Chinese exporters to celebrate over QE3.
The author is a financial analyst in Shanghai.