IN a speech in February in Washington, DC, Federal Reserve chairman Ben Bernanke said that despite various efforts, it could be a long time before employment levels in the country return to more comfortable pre-downturn levels of around 5 percent.

And when asked after his speech whether another round of the Fed's so-called "quantitative easing" would be necessary after the current round (known as QE2) comes to an end in June, Bernanke replied, "The Fed will decide the same way it always does" - by looking at various economic metrics, including the unemployment rate, which has been hovering around 10 percent for some months.

As the number of people out of work in the country remains high, it looks increasingly likely that the Fed will proceed with QE3, a move likely to be met with a chorus of disapproval around the world.

As under the first two rounds of quantitative easing (beginning in March 2009 and November 2010) the Fed would print money and use the funds to buy bonds and mortgage-related securities - purchases aimed at lowering borrowing costs in the US and stimulating the nation's economy.

But Chinese officials have echoed criticism heard elsewhere around the world that QE2 has also triggered a sharp increase in world commodity prices and an influx of hot money into their country. They expect more of the same if there is a QE3. Experts are divided whether such concerns are justified.

Tian Suhua, an international economics professor at Shanghai Fudan University, notes that the effect of QE2 has been greater than QE1. "The first round of QE only affected China through the trade channel, while in the second round, the ability of US banks and mortgage companies to issue credit was strengthened, so the effect on China was amplified by the money multiplier," he says.

The QE2's primary effect is political, counters Charles Freeman of the Center for Strategic and International Studies, a Washington, DC-based public policy research center.

"It is causing a lot of nervousness in Beijing about the long-term policy of the Fed [concerning] the dollar, and the Chinese administration is worried that the US will pursue a long-term weak dollar policy," says Freeman, a former assistant US trade representative for China affairs. "Recently, China stepped up pressure on the Treasury and the Federal Reserve by asking for reassurance that QE is only a short-term exercise."

Philip Swagel, former assistant secretary for economic policy at the Treasury Department in the US and professor of international economic policy at University of Maryland, agrees that the economic impact of QE2 in general, and on China in particular, has not been as dramatic as it is often made out to be. "QE2 is mainly a signal that the Federal Reserve will not allow deflation and would act in greater strength had the economy not rebounded. In the end, it will have a modest effect on the domestic economy and the international spillover is also modest."

Yet even relatively small, the spillover comes at a sensitive time for many economies, including China's.

Zheng Hui, finance professor at Shanghai Fudan University, says that since the first two rounds of quantitative easing, more US dollars have been circulating in world markets, weakening the value of the dollar against other major currencies.

Given that international commodities are priced in dollars, he says, everything from oil to sugar has become more expensive.

In March, for example, the FAO Food Price Index - a measure of the monthly change in the international prices of a basket of food commodities - averaged 230 points, down 2.9 percent from its peak in February, but 37 percent above March last year.

Oil, meanwhile, hit US$120 a barrel - the highest level in more than two years- though the turmoil in the Middle East and North Africa is the big factor influencing oil prices currently.

Rising commodity prices

Nonetheless, Zheng isn't alone in underscoring the extent to which accommodative policies, such as the Fed's, should shoulder some of the blame for the rise commodity prices.

As a report by the Bank of Japan notes, "Globally, accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and by driving more investment flows into ... commodity markets."

For China, that matters a lot. Its import-dependent economy is feeling the pinch of higher commodity prices amid concerns about major public backlashes about higher fuel and food bills.

"China has few choices but to continue importing those global commodities," says Zheng. "Even if crude oil prices and food prices keep soaring, China is unlikely to reduce its expenditures on these imports."

Yet according to University of Maryland's Swagel, "China's own monetary policy is problematic in the first place.... the soft peg to the dollar forces China to have excessive liquidity that boosts inflation."

Tian of Fudan University warns that the big danger of a QE3 is that it will challenge the credibility of the US dollar. "If countries around the world bypass the US dollar during international trade, dollars will flow back to the US and that would be a serious problem for the US," he says.

Zheng of Fudan University notes that in the event of further easing by the Fed, China will most likely have to allow the yuan yuan (RMB) to appreciate.

"A third round of QE equals another round of competitive depreciation of the US dollar," he says. "Since the RMB maintains a soft peg to the dollar, the yuan's RMB's exchange rate will also depreciate against other major currencies. China's major trading partners, such as Japan and the European Union, will suffer from an unfair trade disadvantage. In this sense, a third round of QE would exert additional pressure on Beijing to allow a faster pace of the RMB appreciation."

What's more telling about QE1, QE2, and the prospect of QE3, is the war of words unleashed by the world's two largest economic heavyweights as a result.

"The two countries are blaming each other for their problems," says Swagel, "However, the fact is that China is not the main cause of US problems and vice versa."

(This is an excerpt from an article from China Knowledge@Wharton, http://knowledgeatwharton.com.cn. To see the full, original article, please visit the following link: http://bit.ly/i0dlXx)