The introduction of the unprecedented quantitative easing policy in the United States has the most direct impact on China's monetary policy. China passively follows the United States in making adjustments.

The introduction of the Federal Reserve’s quantitative easing monetary policy will not only directly affect the economic recovery and inflation of the United States, but will also bring significant changes to the U.S. dollar exchange rate, commodity prices and international capital flows, which will indirectly affect The operation of China’s economy and finance and the direction of macroeconomic policies. Policymakers need to make forward-looking adjustments to reduce the negative impact of Fed policy changes on China's economic performance.

Short-term international capital inflows have intensified

Under the influence of the Federal Reserve’s quantitative easing monetary policy, the federal funds rate is at a historically low level and the US dollar is trending weaker. Under expectations of RMB appreciation, an inversion of the interest rate differential between China and the United States, and good expectations of China's economic stabilization and recovery, the flow of short-term international capital into China has been accelerating since 2009. In the coming period, as the "deleveraging" process of international financial institutions ends, a large amount of liquidity injected by the Federal Reserve into the financial market will flow to emerging market countries, including China, through various channels. However, once the U.S. economy enters a sustained recovery, the Federal Reserve will gradually exit quantitative easing and gradually tighten monetary policy, and U.S. lending market interest rates and federal funds rates will rise. This would make the dollar appreciate and unwind some carry trades. Once the U.S. dollar stabilizes and strengthens, Treasury interest rates rise, and commodity prices fall, asset bubbles may burst. A large amount of speculative funds have withdrawn from China, causing sharp fluctuations in asset prices and posing huge hidden dangers to China's financial stability. We must draw lessons from the bursting of asset bubbles and financial crises in East Asian countries in the 1990s.

The dilemma of RMB exchange rate adjustment

Quantitative easing monetary policy has increased the volatility of the US dollar exchange rate and increased the difficulty of reforming the RMB exchange rate mechanism. Since the reform of the exchange rate formation mechanism on July 21, 2005, the RMB exchange rate level has also undergone significant changes. However, from July 2008 to March 2009, the financial crisis worsened sharply and risk aversion increased. International financial institutions and companies have withdrawn funds to the United States or converted them into U.S. dollar assets, causing the U.S. dollar to maintain its appreciation against major currencies. Against this background, the RMB has actually returned to the exchange rate system pegged to the U.S. dollar, and the fluctuation range of the RMB against the U.S. dollar has remained between 6.82-6.84. The introduction of the quantitative easing monetary policy in the United States in late March 2009 led to rising U.S. inflation expectations, increased Treasury financing risks, and active U.S. dollar financing arbitrage transactions. Coupled with the rebound of the global economy, the demand for the U.S. dollar as a safe haven has greatly weakened, and U.S. dollar assets have been used to maintain value. funds are once again chasing high-yield assets, and the dollar is depreciating. As the US dollar weakened, the RMB exchange rate has depreciated for seven consecutive months since March 2009, with the nominal effective exchange rate and real effective exchange rate depreciating by 9.17% and 7.67% respectively.

In the context of the depreciation of the US dollar and the influx of short-term international capital, the pressure for RMB appreciation has once again emerged, and the RMB exchange rate policy is once again at a crossroads: Should we choose slow appreciation or substantial appreciation? We believe that the Chinese government is unlikely to choose a substantial appreciation strategy. First of all, under the mode of substantial appreciation, hot money can obtain the benefits of appreciation in a very short period of time, and the cost of hot money profit will be greatly reduced. Secondly, it is difficult for us to find an equilibrium exchange rate point and cannot calculate the appropriate level of appreciation. If a substantial appreciation strategy is adopted, the RMB exchange rate is likely to overshoot, and the risk of capital flow reversal is very high. Or if the one-time substantial appreciation does not rise to the level, there may be expectations for the next appreciation, resulting in excessive hot money inflows. No matter what the situation is, it will result in large inflows and outflows of funds and create macro-financial risks. Furthermore, a sharp appreciation will have a greater impact on export-oriented enterprises, and the economy may experience a sharp decline, leading to serious unemployment problems.

In the current international economic environment with great uncertainty, the RMB exchange rate level is likely to remain unchanged in the first half of 2010. Even if the RMB appreciates against the US dollar, it will be in a moderate, gradual and controllable manner. In this way of appreciation, appreciation expectations, hot money inflows, asset bubbles and inflation risks will all be challenges that the monetary authorities need to face.

Inflation is back

Facing the inflation risk brought about by capital inflows and rising resource prices, China’s CPI and PPI have been rising month-on-month for several consecutive months and will achieve year-on-year growth in the fourth quarter. Turning positive", it is expected that continued moderate inflation will occur in 2010. According to the central bank's depositor survey in the third quarter of this year, residents' inflation expectations continue to strengthen, with the index of future price expectations reaching 66.7% in the quarter, rising for the third consecutive quarter. The Federal Reserve's quantitative easing monetary policy has increased the risk of global inflation and asset bubbles in the future, and has been transmitted to emerging market countries through various channels.

First, the quantitative easing monetary policy launched by the Federal Reserve has weakened the attractiveness of U.S. dollar assets to short-term international capital. Driven by expectations of RMB appreciation and the interest rate gap between China and the United States, a large amount of short-term international capital has poured into China. .

At the same time, due to the recovery of external demand, China's export environment will further improve and the trade surplus will return to a higher level. Through these two channels, U.S. liquidity is imported into China, leading to increased inflationary pressure in China.

Second, quantitative easing monetary policy has caused a surge in energy and other commodity prices through rising inflation expectations and the depreciation of the U.S. dollar, causing China to experience greater inflationary pressure. After the introduction of quantitative easing monetary policy, the US dollar continued to weaken. Since the US dollar is the main pricing currency for global energy and commodity transactions, the depreciation of the US dollar directly promoted the rise in energy and commodity product prices. In the structure of my country's imported commodities, bulk commodities, especially resource commodities, account for a large proportion, and rising international raw material prices are easily transmitted to domestic PPI. Although the current price controls cover up the inflationary pressure transmitted from PPI to CPI, if resource product price reform is launched in the future, CPI will bear upward pressure from upstream prices.

Monetary policy may passively follow the United States to adjust.

The launch of the United States’ unprecedented quantitative easing policy will have the most direct impact on China’s monetary policy. China will passively follow the United States to adjust. If China does not follow the quantitative easing policy of the United States and the world, the RMB will likely generate greater appreciation pressure and bring more capital inflows. If China follows the policies of the United States, China's money supply will be very sufficient since there is no deleveraging problem among Chinese households and financial institutions. Therefore, whether China follows U.S. monetary policy or not, there will be ample liquidity, which will promote the emergence of asset price bubbles.

In the medium to long term, China’s savings exceed investment, its trade surplus remains high, and it is in a period of demographic dividend. These factors are difficult to change in the long term. In the short term, driven by the inflow of hot money and the increase in China's exports driven by foreign inventory replenishment, global capital flows to China, China's foreign exchange reserves are accelerating again, the pressure for RMB appreciation is increasing, and excess liquidity may occur again, pushing up price levels. . Since the RMB returns to the "peg" mechanism to the US dollar, according to Mundell's "Three Yuan Paradox", when cross-border capital flows cannot be effectively controlled, the People's Bank of China will partially lose its monetary policy autonomy.

In this case, China’s monetary policy will follow the adjustment of U.S. monetary policy. Only when the Fed's signal to raise interest rates is very clear or even announces a rate increase, will the People's Bank of China raise the benchmark interest rates for deposits and loans. In the early stages of inflation, the adjustment of China's monetary policy will rely more on quantitative tools, such as credit "window" guidance, repurchasing central bank bills, issuance of directional bills, deposit reserves, etc. The sequence of macro-control policy tightening It is likely to start from window guidance and prudential supervision, then to open market operations and deposit reserve ratios, which may be accompanied by tightening of project approvals, and finally enter the interest rate hike cycle.