ECB's QE move adds pressure on China's policy easing

The Europe Central Bank joined its counterparts in injecting liquidity into their regional economy, adding more pressure on China to further policy easing to spur slowing growth.

The ECB took a further step towards quantitative easing on Thursday, launching a government bond-buying program which will pump hundreds of billions of fresh cash into a floundering euro zone economy.

Central banks in Denmark, Turkey, Canada, Switzerland, and India also decided to lower interests in the past two weeks to stimulate ailing economic development.

"The abundant capital might flush to the United States, Britain and emerging countries, pushing up assets prices," said Yi Xianrong, a senior researcher with the Chinese Academy of Social Sciences.

The ECB's QE step is expected to push the Chinese yuan to appreciate, dampening already ailing Chinese export and adding more deflationary pressures on China with the continued low oil and commodity prices, according to Yi.

China's economy grew 7.4 percent in 2014, posting its slowest expansion pace in 24 years.

"In the face of downward pressure, we did not resort to strong stimulus," Chinese Premier Li Keqiang said at World Economic Forum annual meeting in Davos on Wednesday, reiterating that China will pursue a prudent and proactive monetary policy.

At an earlier panel, Chinese central bank governor Zhou Xiaochuan said People's Bank Of China (PBOC) would keep money supply stable and not inject too much liquidity into the economy. The central bank on Thursday conducted reverse-repurchase agreements for the first time in a year, helping to meet a seasonal increase in cash demand before the Chinese Lunar New Year holidays.

However, many investment banks and economic research institutions predicted further policy easing for China to sustain momentum and avoid a sharper downturn.

"Against the backdrop of an uncertain global recovery and a weak property market, we believe more aggressive monetary easing and further growth-supporting reforms will be deployed to anchor domestic demand in the coming months," according to Qu Hongbin, HSBC chief China economist.

Given recent developments and liquidity dynamics, J.P. Morgan expected the first RRR cut or other policy instruments such as Pledged Supplementary Lending (PSL) and Medium-term Lending Facility (MLF) may come before the Chinese New Year, during which period liquidity demand will increase significantly.

In 2014, in the four weeks prior to the Chinese New Year, the PBOC injected 450 billion yuan liquidity on a net basis via open market operations and 190 billion yuan via SLF.

However, if China conducts too much policy easing, it might run the risk of worsening the social debt level and disrupting economic deleveraging and restructuring, Yi cautioned.