News Analysis: China immune to side effects of ECB's QE?

Quantitative Easing (QE) program by the eurozone is unlikely to impact directly on China through financial markets, but it may affect China's monetary policy-making and have an indirect negative impact on China's real economy in turn, experts have said.

If QE is successful for the EU, it may be good for Chinese export in the long run, but negative consequences for China lies in the fact that with major economies such as Japan and the eurozone pushing ahead with stimulus measures, China may be dragged into a "game" of competitive devaluation and even into a currency war it doesn't want, experts warned in interviews with Xinhua.

CHINA EXPORT TO EU

"The move to quantitative easing in the EU is unlikely to have major direct impacts on China through the financial markets, as China has a still largely closed capital account, so it is not fully open to portfolio inflows," Rupert Willis, desk officer for China in the Directorate General for Economic and Financial Affairs of the European Commission, told Xinhua.

"This insulates China to some extent from global monetary changes," he added.

However, he noted there may be some positive impact on China also. "If QE is successful in boosting demand and growth in Europe. This could be positive for China through the impact on demand for Chinese exports."

Rajiv Memani, chairman of Global Emerging Markets Committee, Ernst & Young Global, told Xinhua the risk China may have to take is its exports to the EU.

"Such monetary policies need to be carefully watched depending upon the trade relations it carries. With a depreciating euro, China will be able to import more, but it's a risk for Chinese exports to EU," he said in a recent interview with Xinhua.

"The main effect is that Europe will restore its demand, which will also raise trade with China and other countries," said Fredrik Erixon, Director of the European Centre for International Political Economy (ECIPE).

"The important thing is that China's export to Europe has stagnated in the past years and that it will continues to be muted unless Europe can restore its economy," Erixon added.

CURRENCY WAR?

Experts also noted that QE of the European Central Bank may bring challenges to China's monetary policy making.

"While the United States has abandoned its QE policy, but other economies such as Japan and the eurozone are pushing ahead with stimulus, and competitive devaluation of their currencies will be one result of this," Duncan Freeman, senior research fellow at Brussels Institute of Contemporary China Studies, Vrije Universiteit Brussel, told Xinhua.

"These devaluations will have a negative impact on China, and it will be a challenge to avoid becoming caught in a currency war," Freeman added.

His opinions were echoed by Tan Yalin, dean of the China Foreign Investment Research Institute.

"China will be spurred to follow suit of Europe's QE, which China's economy does not need and cannot afford to have," Tan told Xinhua.

When in a state of excessive liquidity, the theory of interest-rate cut and deposit reserve ratio reduction will not work but lead to more speculation in financial markets thus worsen the real economy, she said.

Over last weekend China cut its interest rates which was the loosening move in little more than three months. Tan said China' s recent loosening move was certainly influenced by the overseas factors indicating the QE of the EU and Japan. Endit