China central bank says Fed easing ineffective and dangerous

BEIJING (Reuters) - Quantitative easing by the Federal Reserve and other central banks cannot address fundamental economic problems but may lead to excessive global liquidity and competitive currency depreciation, China's central bank said on Sunday.

In its monetary policy report for the final quarter of 2010, the People's Bank of China (PBOC) also confirmed that it would target 16 percent growth of the broad M2 measure of money supply this year, down from the 19.9 pct growth recorded at the end of 2010.

The central bank said the Fed's monetary easing was pushing up international commodity prices and asset prices in emerging markets, including China.

"Quantitative easing policy cannot fundamentally address economic problems, and it may cause excessive liquidity on a global scale as well as risks of competitive currency depreciation," the Chinese central bank said in its 59-page report.

"It is creating imported inflation and short-term capital inflows, pressuring emerging markets," it said.

As a result, China needed to work hard to soak up liquidity from foreign exchange inflows in order to minimize the impact on the domestic economy, it added.

The central bank reiterated that it would keep the yuan basically stable while making the exchange rate regime more flexible.

The central bank said it would continue to use different tools, including interest rates, bank reserve requirements and open-market operations, to rein in money supply and bank credit growth as a way of handling inflationary pressure.

(Reporting by Zhou Xin and Michael Martina; Editing by Simon Rabinovitch)