October 13, 2012 / 1:27 PM / 8 years ago

China central bank chief wary of QE3 inflation risk: paper

BEIJING (Reuters) - China’s central bank governor has warned that quantitative easing policies worldwide could cause inflationary risks, state news agency Xinhua said on Saturday.

China's Central Bank Governor Zhou Xiaochuan arrives for a group photo taking session with other REUTERS/Jonathan Ernst

The remarks by People’s Bank of China (PBOC) Governor Zhou Xiaochuan come even as analysts credit policy easing from G4 central banks - the U.S. Federal Reserve, the European Central Bank (ECB), the Bank of Japan and the Bank of England - in the third quarter of the year as underpinning business confidence.

Chinese data on Saturday offered a sign that G4 policy easing was being felt in the world’s second biggest economy, with trade numbers showing exports grew at roughly twice the rate expected in September while imports returned to the path of expansion.

“The data shows both imports and exports are improving - especially a rebound in export growth reflects a rising confidence after the U.S. and European countries launched further easing policies last month,” said Xue Hexiang, an analyst at Guotai Junan Securities in Shanghai, after the trade numbers were released.

Across Asia, central banks are wary about the potential inflationary impact of the Fed’s latest quantitative easing, dubbed QE3, as well as policy stimulus unveiled by the ECB.

Central banks “should consider draining excessive liquidity injected into the market and eliminate inflationary pressure in the long-term”, Zhou was quoted as saying by Xinhua, which cited the Journal of Public Research, a magazine published by the People’s Bank of China.

China’s central bank said in September that it would “fine tune” policy to cushion the economy against global risks while closely watching the possible impact from recent policy loosening in the United States and Europe.

China’s economy has slowed for six successive quarters and economists expect that Q3 growth data due on October 18 will confirm the slide extended for a seventh. The consensus forecast in a Reuters poll is for annual growth of 7.4 percent in Q3, down from Q2’s 7.6 percent.

Under the banner of policy fine-tuning, China’s central bank cut interest rates twice in June and July and lowered banks’ reserve requirement ratio (RRR) three times since late 2011, freeing an estimated 1.2 trillion yuan for boosting loans.

But it has refrained from cutting interest rates or RRR since July. Instead, it has opted to inject short-term cash via its open market operations into money markets to ease credit strains.

China’s annual rate of inflation was 2 percent in August, half the 4 percent targeted by the central bank, though nudging higher from July’s 1.8 percent rate. The PBOC has fought hard to bring inflation down from a three year peak of 6.5 percent hit in July 2011 and is determined to contain price pressures.

Consumer price data for September is due to be published on October 15 and the benchmark Reuters poll has a consensus forecast for annual inflation of 1.9 percent.

Meanwhile China’s long-term inflationary pressure could be alleviated by the slowing rate of acquisition of foreign exchange reserves, Zhou said.

China’s official reserves, the world’s largest at $3.29 billion as at the end of September, have been relatively steady this year as global trade has slowed and Chinese exports along with it.

Foreign reserves are a key component of money supply. A slowdown in accumulation implies a reduction in the rate of monetary expansion and consequently easing inflation pressure.

Zhou, writing in the official China Financial Research Journal, said reserves would not keep growing endlessly as the share of the current account surplus in the country’s economy was already very high and would drop in future, according to a report in the Security Times newspaper.

Reporting by Sui-Lee Wee and Xiaoyi Shao; Editing by Nick Edwards

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