QE2 may have 'catastrophic consequences' for global economy

Updated: 2010-11-12 10:54

By Ren Jie (chinadaily.com.cn)

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QE2 may have 'catastrophic consequences' for global economy

 Cheng Siwei
The US Federal Reserve's recent move to issue $600 billion for restoring a foundering US economy may have catastrophic consequences for the global economy, according to Cheng Siwei, economist and former vice-chairman of the Standing Committee of the National People's Congress.

Cheng made the remarks at "A World Summit: The Ascent of China's Capital Markets" in Beijing on Wednesday.

Emerging-market stocks rose and prices of bulk commodities surged significantly last week following the US Fed's announcement on Nov 3 that it will buy $600 billion in Treasury bonds to boost the US economy, in a move known as "quantitative easing" (QE2), which triggered global debate. Many economists say they believe that the policy's effectiveness is uncertain.

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Cheng said the US QE2 may trigger inflation in global markets, adding that the move will lead to an inflow of hot money to some countries and put appreciation pressure on the currencies of those countries.

Cheng also said there are many ways for hot money to enter in China, especially since the country's central bank is raising interest rates. He said busting underground banking rings will help the country curb hot money inflows.

Cheng also said he is a "prudential optimist" and is confident in the performance of Chinese stocks in 2011. He admitted that the A-shares are still in a bear market, but said the worst part of it is over. Chinese capital markets will gradually enter in a bull market next year as the nation's economy growth remains stable.

QE2 may have 'catastrophic consequences' for global economy

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