QE3 to enhance Australia, China economic ties

The ongoing fallout from QE3 could succeed in driving closer economic ties between Australia and China, according to the Head of Investment at KVB Kunlun.

While markets continue to grapple with the consequences of the latest round of quantitative easing on the US dollar, Stephen So told Xinhua that while short-term effects on the Australian dollar will stabilize, the long-term impact of QE3 will further entwine Australia and its leading trading partner, China for 'the sake of the region.'

"Because everybody's expecting massive depreciation of the U.S. dollar, that will push up the exchange rate of the renminbi. In that case, that may push the relationship between Australia and China closer." So said.

The two countries have already signed a five-year 30 billion U. S. dollars currency swap agreement in March, signaling stronger economic ties.

With rumours of a new Chinese stimulus plan for October, So says the faltering Chinese market faces renewed uncertainty leading up to the U.S. election.

Aussie dollar effects short-lived

Though the Australian dollar hit a six-month high over the weekend, the effects of QE3 won't last, So predicts.

"The QE3 may have some short term effects on material prices, especially on precious metals like gold and silver, but on other materials like iron ore or coal, prices will be just as much as before.

"In the short run, the Aussie dollar will rise against the U.S. dollar. But in the long run, because of fundamental weaknesses both in the Chinese and the Australian economy, I think this round, the QE3, won't affect the Australian dollar as much as the QE1 or QE2." He said.

The first round of quantitative easing (QE1) over 2008 and 2009 saw the Australian dollar rise above 50 per cent against the USD, while the impact of QE2 in 2010-11 was less dramatic.

In both cases the AUD soon stabilised, and the same can be expected for QE3, So assures. "Once the excitement of last week' s announcement settles down, I think domestic inflation in Australia will remain low," he added.

China braces for impact

The forecasted stabilization of the Aussie dollar is some consolation for the Chinese economy, which is anticipating a slowdown in the manufacturing sector due to the depreciation of the USD.

But So suggests that the long term effects of QE3 for China are still unclear, and will become more apparent later in the year.

Over the coming months, "we need to look at the U.S. election, see the final outcome, and then we'll see the long term effects of the QE3 on the Chinese economy and the manufacturing sector," he said.

And an anticipated stimulus plan from the Chinese government may prove an economic game-changer.

"The market has been expecting the Chinese government to release a massive new stimulus plan after October, but we don't know for sure, and the uncertainty in the market is growing.. Volatility in the market will be much greater than before, so investors should be cautious."

While China and Australia continue to break new ground in an economic relationship dominated by Chinese demand for Australian resources, China and the U.S. remain at loggerheads when it comes to fiscal policy.

"They're (the US Federal Reserve) just spinning money out of nowhere, and the rest of the world has to feel the damage."

So added, regardless of who becomes the next president, "there will be a tougher environment between the U.S. and China on both economic and political fronts. That is the main effect."