Economic Impact to China After Qe3

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On September 13, 2012, the Federal Reserve announced another round of quantitative easing (QE). Discuss the expected economic impacts of “QE3” on selected East Asian Country. On September 2012, the Federal Reserve announced a new round of open-ended quantitative easing named QE3. Unlike the previous quantitative easing, the Fed decided to continue buying mortgage-backed securities until the economy is improved, rather than creating another fixed endpoint package. The first quantitative easing was introduced by Fed in November 2008 in order to create credit in the private market to help revitalize the mortgage lending and support housing market as well as lower down interest rate in general. Therefore, Fed purchased a total of $1.75 trillion in mortgage-backed security, federal agency debt and long-term treasuries. In November 2010, Fed implemented the second round of quantitative easing by purchasing up to $600 billion long term treasuries bills intend to lower overall interest rate to spur consumer spending and business investment (Federal Reserve Bank of St. Louis, 2011). The third round of quantitative easing is introduced to seek economic development and reduce the high unemployment rate from 7.9% to less than 7.0% in the US economy. Hence, Fed decided to continuously purchase $40 million of mortgage-based security per month and maintain a zero-interest rate policy up to mid-2015 until the labor market shows improvement. Implementation of QE3 in the US economy will have severe impacts on a few aspects in the China economy. First of all, QE3 execution in US economy will create a huge money supply in the economy and also will create a vast flow of hot money throughout the Chinese economy. Besides, China’s inflation rate will also be affected as well as the China’s currency, Yuan. Third round of quantitative easing by US Federal Reserve will be expected to create a global flow of hot money from developed countries to the emerging markets. According to the (Pearson 2012), emerging markets can be defined as simple as those countries that are not considered developed. Other key attributes of emerging markets are high level of growth rate and high GDP per capita. China has been considered to be one of the biggest emerging markets in the world. It had an extraordinary growth rate of 10.475% on average for the past 20 years since 1992 to 2011, calculated from the data provided by the World Bank (GDP Growth (Annual %), 2012). Hence, QE3 will highly expect to generate a vast stream of hot money into China economy.

Based on the source above from the research note “Capital Flows to Emerging Market Economies” by the Institute of International Finance, both QE1 and QE2 concurred with a momentous flow of capital. These flows can be seen both from the capital outflow from US and capital inflow into the emerging markets. This turnaround was particularly sharp at the early stage of both QE1 and QE2 while FED communicated to the public to commence a substantial acquisition of assets. The portfolio outflow had then auxiliary speeded on the first half of implementation phase for both QE1 and QE2. However, it had been slowed down in the late implementation phase. Nevertheless based on past experience, the third round of quantitative easing by the Federal Reserve in this September will create a huge flow of capital from the US economy to the emerging market and the first and foremost economy to be expected to receive this capital inflow is the China economy. Investor’s demand for investment opportunities in the emerging market portfolio assets began to soar with the low interest rates and diminishing asset investment returns in developed economies, fueled by the favorable global liquidity movement (Kim & Doo, 2008). This favorable global liquidity movement or known as the inflow of ‘hot money’ will create an enormous effect to the China economy in terms of the assets prices. There are three channels that will lead to increase in...
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