QE3 May Offer Relief to Subdued Chinese Economy

Chinese stocks didn’t join the global celebration after the Federal Reserve announced a third round of quantitative easing last week, as accelerating inflation limits the scope for bolder actions by the People’s Bank of China to spur growth while the yuan appreciates against the dollar. Still, the prospect of improving exports driven by QE3 may be China’s only near-term trump card, while investment and monetary easing are likely to face challenges.

The Shanghai Composite Index has underperformed almost all major equity indexes, dropping 35 percent since the beginning of 2010, worse than the markets in debt-ridden countries such as Spain, whose IBEX 35 index lost almost 33 percent. Chinese equities are hurt by the lack of investor confidence and a past overreliance on investment, which led to bubbles in various industries.

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