QE2 may put huge pressure on emerging economies

WASHINGTON - China is set to become the third-strongest member of the International Monetary Fund (IMF) under a "historical" plan approved by the institution's board on Friday, a position allowing the country to take more "responsibility" in the global economy, the fund's chief said.

The plan "may have an influence on the behavior of the Chinese authorities", Managing Director Dominique Strauss-Kahn told reporters in Washington. "They were willing to be better represented in the IMF, which shows that they care about multilateral institutions, and I expect that they will behave having in mind the importance of their role."

Acting on an Oct 23 deal by finance chiefs of the Group of 20 nations, the IMF agreed to shift more than 6 percent of voting rights to what officials called "dynamic" developing countries. That would give more say to nations such as Brazil and South Korea, while weakening the clout of European members including Belgium and Germany. "Advanced" European countries are also set to give up two seats on the board under the package.

The US Federal Reserve's second round of quantitative easing, or QE2, will bring huge challenges to emerging economies, Vice Finance Minister Zhu Guangyao said at a seminar on Nov 6, the Shanghai Securities News reported on Monday.

On Nov 3, the Fed announced its plan to purchase $600 billion worth of government bonds to prop up the ailing economy.

Zhu said the current US trouble resulted from the absence of the "bolstering" role of capitals to the real economy, instead of insufficient liquidity.

 
He warned newly-added liquidity would flood the US stock market as well as flow into emerging markets to seek profits, posing great challenges to those economies. Many of them would have to take measures to restrict capital inflows, Zhu added.

Chinese economists are worried that excessive liquidity as a result of QE2 would flow to emerging countries including China and Brazil, the paper said.

Zhou Xiaochuan, governor of the People's Bank of China, the central bank, said earlier at an economic forum that QE2 was "not likely" to benefit the global economy although it might help the US boost employment and keep a low inflation rate.

Zhou said China will work to prevent abnormal capital inflows by stepping up foreign exchange controls and maintaining overall liquidity at a proper level.
(Source:China Daily )