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China may face more challenges from changes in monetary policy at the U.S. Federal Reserve (Fed) than the European Central Bank's (ECB) quantitative easing (QE) program that began on Monday, an European expert has said.
Rupert Willis, desk officer for China in the Directorate General for Economic and Financial Affairs of the European Commission, made the remarks in a recent interview with Xinhua.
The ECB's bond buying program aims to fend off deflation and boost the euro area economy by pumping more money into the real economy.
Many analysts hold the view that the ECB'S QE could be bad news for emerging markets like China. Because Europe is China's biggest export market, China could possibly be forced to devalue its currency as the euro falls against the dollar.
Willis, however, downplayed the direct impact of the ECB's QE on China's economy, and instead focused on the Fed tightening monetary policy.
"The challenge to China from changes in monetary policy may come much more from likely changes in the U.S. Federal Reserve policy during 2015," he said.
"A tightening of global monetary conditions as the Fed raising rates will mean tighter credit conditions for some Asian economies, which may affect their demand for Chinese goods," he explained.
The U.S. dollar has been surging recently against the euro and the Japanese yen, with analysts predicting the trend will strengthen and accelerate.
Some U.S. analysts said the Fed is likely to begin the rate hiking process in June, and then hike again in October and December.
"The euro area is now competing with China to export excess savings. China might soon have to rethink its dollar peg when domestic investment cools down, especially in the residential sector," Daniel Gros, director of the Brussels-based Center for European Policy Studies, told Xinhua.
However, Tan Yalin, dean of the China Foreign Investment Research Institute, told Xinhua the rise of the U.S. dollar was not sustainable, as this will squeeze earnings of U.S. exporters and companies with international operations and could limit inflation as import prices fall.
"The United States is only likely to raise interest rates when U.S. domestic growth is strong, which is likely to be good for China. So the overall effect is hard to assess," Willis also added.
Regarding the effects of the ECB's QE on the eurozone economy, Gros, warned that monetary policy can only have very limited effects in a liquidity trap situation: a situation where companies are not investing and consumers hoard money because they expect an adverse future.
"The expanded asset purchase program will have very limited overall effects in a creditor economy like that of the euro area. The positive effects in the periphery are likely to be approximately offset by negative effects through lower interest income in the core," he said.
"The only important impact is likely to come through the exchange rate. But this leads to a level effect, not a permanent growth impulse," he added.
