What Should China Do If the U.S. Money Machine Keeps Running?

It could just be a coincidence, or it could be telepathy between the two major powers — just a few hours after China published its economic data for the first six months of the year, the U.S also announced its economic data for the first half of the year.

The difference was that China’s economic data mirrored not only conflicts and problems, as well as difficulties and pressures that the Chinese economy has been facing after the financial crisis, but also reflected the achievements as macro-economic controls and numerous measures were adopted to fight the financial crisis, and projected hope that the Chinese economy will emerge from the difficult situation. The reason was that economic development, control and management of inflation, mass employment, and increase of income all met market expectations; all showed that difficulties and hopes coexist; and no indications emerged to make people overly pessimistic. Therefore, as long as the world’s economic order does not change much, as long as a severe worldwide economic and financial crisis does not happen again, China’s economy will continue to develop in a positive direction and will not again fall to the bottom.

On the contrary, U.S. economic data for the first six months was not so optimistic. On the one hand, the state of the economy was still weak, lacked serious imperatives towards growth, and did not demonstrate any apparent improvement. Therefore, when U.S. Federal Reserve Chairman Ben Bernanke testified at a hearing in the Congress concerning the U.S. monetary policy of the first six months, he had no choice but to acknowledge that it was still possible that the duration of the recent economic slowdown might last much longer than originally predicted, and that the risk of deflation might re-emerge. On the other hand, unemployment rates has been persistently high, up to 9.2 percent, much higher than the economy’s growth rate. Critics widely questioned and sharply lashed out at the U.S. government and the measures it adopted, and considered that the U.S. Federal Reserve’s monetary policy to be a failure. Bernanke, himself, also faces extensive criticism, because the problems in the current U.S. economy appeared after the U.S. government fought against tremendous pressure from world public opinion and implemented the second round of quantitative monetary easing policy.

Also because of this, while Bernanke defended his policy, he also indicated that the U.S. Federal Reserve may continue to buy more U.S. government bonds, to inject more mobility into the economy, and might lower the interest rate when banks pay their payment reserve to the U.S. Federal Reserve, in order to help lower merchants’ commercial loan interest rate. This is the so called third round quantitative monetary easing policy.

As we all know, the second round of quantitative monetary easing policy, carried out by the U.S. government in November last year, used $600 billion to acquire Treasury bonds, and will mature by the end of June this year. Earlier, because there appeared to be a relatively serious problem of excess liquidity worldwide, many countries criticized the U.S.’s implementation of the second round of quantitative monetary easing policy. They thought that the U.S. government did not carry out the duties as a major power and was being irresponsible.

The problem is that the “irresponsibility” did not go away, just because the term of the second round of quantitative monetary easing policy matured. On the contrary, it is quite possible that the third round of quantitative monetary easing policy will soon be unveiled, and the formalities will be even more diverse.

A fact that was worthy of attention was that at the beginning of the explosion of the financial crisis, as many countries, including China, sequentially unveiled their economic stimulus policies, fought against the financial crisis together, made efforts to limit the impact of the financial crisis to a minimum; the U.S., in contrast, kept delaying its $700 billion bailout and stimulus package, due to its consideration of its own interests and systemic constraints. This greatly influenced the effects of other countries’ economic stimulus policies. As indications of excessive liquidity already appeared worldwide, other countries were ready to retreat from their stimulus policies and to begin to carry out gradual tightening policies; the U.S., however, successively implemented its quantitative monetary easing policy and thus made the worldwide conflict of excessive liquidity even sharper. If the U.S. really carries out its third round of quantitative monetary easing policy, then it will be an even more severe challenge to the world economy.

And China will definitely be the first one to suffer. First, as the biggest emerging economic entity in the world, China’s consumer price index in the first six months was at 5.4 percent, and the annual CPI is estimated to be at around five percent. Once the U.S. pushes out its third round of quantitative monetary easing policy, the pressure of imported inflation will be even greater, and the difficulty in realizing the goal of keeping annual consumer prices under control will be much greater. This will be a new test for China when it decides its next macro economic policy.

Second, because the U.S. dollar controls world currencies, other currencies will also cough if the U.S. dollar gets a cold. If the U.S. really neglects the interests of other countries and implements its third round of quantitative monetary easing policy, the the value of other countries’ currencies will continue to rise and thus adversely influence these countries’ employment and export rates. Therefore, as China has always been using three “carriages” — investment, spending and export — as the driving force behind its growth; export, one of the carriages, will be put at an even more disadvantageous position, and economic acceleration will be greatly affected.

Third, energy prices, especially oil prices, will continue to increase. For quite a while in the first six months of the year, the price of oil was on an upward trend. At one point, crude oil prices were very close to the highest in history. It is believed that once the U.S. carries out the third round of quantitative monetary easing policy, a new round of increases in oil prices will appear, and it is very possible that it will break the highest point in the previous period. This is not a good thing for China, which has been controlling inflation, changing its economic development model and adjusting its economic structure.

Fourth, employment is the main reason that the U.S. intends to carry out its third round of quantitative monetary easing policy, as the unemployment rate is too high, not because of economic acceleration. Just because of this reason, and in order to protect the interests of its own citizens, we can imagine that the U.S. will adopt many more protectionist trade measures, even to the point of speeding up the process of collecting carbon tax. Based on past experiences and lessons, the U.S. will first point the sword at China, adopt measures to restrict the import of Chinese products, and demand that China increase imports of U.S. products. How will China respond in such a situation?

Therefore, the U.S.’s third round of quantitative monetary easing policy will be a strict test for China. We must pay sufficient attention to it and adopt preventive measures as early as possible, so that major impact on economic and social development in China can be avoided.