By Xin Zhiming (China Daily)
Updated: 2008-03-18 09:38

The US Federal Reserve's latest emergency measures are unlikely to bring an end to the financial market crisis, analysts said.

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But they expect the uncertainty will complicate China's situation, in which domestic policymakers are maneuvering to rid the economy of excess liquidity and inflationary pressure.

"I'm not sure what stage the US economy is at or where it's headed," Wang Tao, head of economics and strategy at Bank of America (Greater China), said.

The Fed on Sunday approved a cut in its emergency lending rate for financial institutions from 3.5 to 3.25 percent and created a lending facility for big investment banks to secure short-term loans.

Before that, it provided emergency financing for JP Morgan Chase & Co's $236.2 million buyout deal for Bear Stearns Cos.

"The Fed wants to anchor the market, but these moves may turn out to be symbolic," Li Zhikun, general manager of international clients at China Jianyin Investment Securities, said.

Last week, the Fed said it would inject $200 billion into the banking system and eased lending rules, but the market has continued to fall.

Now, the Fed's poised to deliver another big rate cut. "We think the rate cuts so far haven't been enough," Li said. It's not certain how big today's expected rate cut will be, but many are tipping a hefty three-quarter reduction.

"The interest rate futures market shows that the possibility of the Fed raising the interest rate by three quarters is almost 100 percent, while that of a 100-basis-point cut is 50 percent," Liu Dongliang, a currency analyst at China Merchants Bank, said.

Liu said the US dollar won't recover until the Fed cuts the interest rate to an "appropriate" level.

As the US dollar dives, the yuan is expected to appreciate further. The domestic benchmark interest rate is now higher than the US rate, which may bring more speculative capital into the country.

China's CPI, the key inflation gauge, surged to an 11-year high of 8.7 percent last month. An interest rate rise is expected soon as a way to combat inflation.

"While it's necessary to raise the interest rate, it is more advisable for the country to combine policies such as strengthening forex management to ease its liquidity-induced problems," Wang said.

The authorities are rumored to be considering a high-margin, one-time revaluation after the 11th National People's Congress concludes this week. The People's Bank of China refused to comment.

"A drastic one-time revaluation would be a blow to export-oriented manufacturers and exporters," Liu said. But as the current pace of yuan appreciation is "impressive" - 10 percent annually, based on currency futures - the move is unnecessary, he said.