U.S. Quantitative Easing Could Help China’s Exports

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Aug. 31 – Chicago Federal Reserve Bank President Charles Evans has recently been in Beijing discussing with the Chinese authorities the possible impact of a proposed third U.S. “Quantitative Easing” program (QE3) that would see the United States release money into the American economy to try and kickstart growth. The United States last did this – to howls of protest from China – in 2010.

The result of QE2 was a rush of hot money into China that fed a massive asset bubble – particularly in the property sector. The releasing of large amounts of money into the U.S. economy tends to have the effect of forcing capital into emerging markets where returns are greatest.

This time, however, the impact may be rather different, and China is expected to be more reticent about a U.S. financial binge this time around. A drop in China’s inflation is expected to cool any speculative use of invested monies, reducing the risk of asset bubbles, and is more likely to assist Beijing obtain a balance between maintaining growth in the macro-economy and stabilizing housing prices. In turn, the proposed QE3 would boost U.S. domestic demand, resulting in a boom for Chinese exporters.

Evans has now returned to the United States, leaving via Hong Kong where he told the Hong Kong Bankers Club earlier this week that the United States needed to boost growth and that its interests were more closely aligned with China than two years ago.

“I don’t think we should be in a mode where we are waiting to see what the next few data releases bring,” Evans said at the Hong Kong Bankers Club. “We are well past the threshold for additional action; we should take that action now.”

Evans is now lobbying the Fed to see QE3 realized – with markets awaiting signals from Ben Bernanke this weekend for clues as to the prospect of QE3 happening. If so, the decision to go ahead – in an election year – is expected to be quickly implemented.