The global financial crisis, developed countries slow economic recovery, the United States and high unemployment. China’s exchange rate policy has become a must have in various international debate topic. However, with the implementation of the Federal Reserve for the second time quantitative easing, the dollar depreciated, a global exchange rate seems to have quietly started the war, while China and the RMB was pushed to the vortex center.

China to maintain low interest rates are very dangerous too long

Although China can maintain its existing exchange rate policy, will gradually adjust their own currency, but this is not the quantitative easing environment Hengliangdeshi the only criteria. Can China in the management of exchange rate adjustments, to avoid the negative effects imposed quantitative easing – to avoid the spread of global liquidity potential asset bubble, the mismatch of resources and financial turbulence, is the true test.

Only from the point of the RMB exchange rate, the RMB exchange rate as the root cause of global imbalances is certainly very difficult to set up, China has reason and may refuse to increasingly intense international sharp appreciation of the renminbi requirements.

Although the United States House of Representatives recently passed a trade protectionism against China’s exchange rate motion, however, also need to the Senate, and signed by the President after the coordination. For now, the bill to final passage of the possibility of legislation is still relatively small. Even if passed, there is a certain monitoring time and not immediately bring about retaliatory tariffs. However, resist the appreciation of the nominal exchange rate is just one aspect of this game only.

In fact, no matter whether China or other countries willing to adjust the nominal exchange rate, under the quantitative easing in the Fed, the real exchange rate adjustment will occur, but also is a way we do not want to see happen.

Of course, the Fed worried about growth because of weakness and high unemployment are prepared to continue to increase the size of its purchase of bonds, that is to increase the size of printing money to prevent deflation. However, because the dollar is an international reserve currency, the United States be free to control its money supply, while other countries will have to “be adjusted” “was appreciated.” Some other developed countries, including Japan, have also been prepared following the Fed or the beginning of quantitative easing.

QE consequences? It is not effective in stimulating economic growth in the United States and developed countries, there are a lot of controversy, even within the Fed there are differences. However, one thing is clear, global monetary policy would remain accommodative for longer, interest rates will remain at low levels for longer. In addition, the almost certain that a flood of liquidity will flock to low-risk, high return areas, including China, emerging markets bear the brunt.

The face of strong capital flows and the appreciation pressure on some emerging market countries such as Brazil, Thailand, capital controls have been building high dams, even in the past strongly supported the opening of the capital the International Monetary Fund (IMF) have resorted to the flag of capital controls suggested some Member States to strengthen macro-control reduces the risk and avoid credit and asset bubbles, reducing financial volatility.

Some may say that China can withstand pressure, insist on keeping the RMB appreciation, and we have had capital controls. However, for China, the United States will first impact of quantitative easing monetary policy decisions in China, increasing the risk of policy mistakes. Some people believe that the United States for further quantitative easing reflects the weak U.S. and global economy, so China’s monetary policy should remain accommodative for longer and further stimulate domestic demand to offset the lack of external demand. And, most people believe that interest rates should continue to remain low to avoid attracting more capital inflows. This fear has become a key interest rate causes lag. The global proliferation of quantitative easing and liquidity, likely to further weaken those in favor of real interest rates as soon as possible from negative to positive, exit the voice of the easy credit policy.

China too long to maintain low interest rates and loose monetary and credit policy, is not only a misunderstanding, and is very dangerous. United States and other developed countries, high unemployment, the state also heavily in debt, you may need to maintain the expansion of unconventional monetary policy for a long time to reduce them to the private sector or government, “deleveraging” process of adjustment of the pain. However, the Chinese economy is in a different period, China did not face deflation. China could in the case of weak global economic recovery, to achieve close to 9% economic growth. China does not need additional policy stimulus to return to double-digit growth in the past. Maybe some people hope that China will continue to stimulate domestic demand to boost the world economy recover as soon as possible, but we should take into account policies on the risk of the domestic economy. Moreover, as the population changes in the structure of employment in China has and will continue to ease the pressure.

Because there is no output gap, the Chinese economy of excess liquidity, coupled with negative real interest rates (nominal interest rate minus inflation expectations) is deteriorating, brought about macroeconomic risk is systematically underestimated, resulting in over-investment mismatch of resources, assets bubble. This is not only the current government to stabilize prices, price reform, the goal of inhibiting the adverse real estate prices, the future of the economy and financial system even more difficult to assess the damage.

In addition, under the international background of quantitative easing, China’s current exchange rate policy will be under increasing political pressure and the impact of speculative capital. Quantitative easing expectations the Federal Reserve has led to the U.S. dollar against the euro and other major currencies tumbled. In this context, China’s exchange rate by the slow appreciation of the deep international criticism, although some other Asian countries are China, but also as a “shield.” The political pressure is bound to increase the appreciation of market expectations. As a result, coupled with China’s economy is relatively high return on investment, the expected appreciation and large, will attract more capital, whether actual investment or speculative capital influx. The capital inflow will further increase the upward pressure.

In the current environment, if properly managed, could accelerate the appreciation of the RMB self-defeating. On the one hand, accelerate the pace of appreciation could reduce international pressure on the short term, reduce the threat of trade protectionism in the long run will also help reduce China’s trade surplus and economic restructuring. On the other hand, under the quantitative easing to accelerate the pace of appreciation may increase expectations of further appreciation, attract more capital inflows, offset by the appreciation of the initial effects of the liquidity crunch. So far, the scale of hot money inflows Shangqie not, however, if China does not further strengthen the control, this situation may soon change.

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