The U.S. Federal Reserve on September 13 announced a new round of bond-buying and extended the duration of its ultra-low short-term interest rate until mid-2015, marking the third round of quantitative easing, also known as QE3. This new move is bound to impact the global economy, as well as international capital flows, due to its core role in the international monetary system. China is not excluded from the impact.

On the positive side are short-term and medium-term benefits to China's exports. QE3 can help increase growth rates in the EU and the United States, which are the biggest export destinations for China. Therefore, Chinese exporters will benefit from stronger demand in those countries after QE3 is rolled out.

QE3 can also prop up the market primary commodities and thus benefit developing countries and regions that are highly dependent on those commodities. Those countries and regions will absorb more Chinese exports. For the past 10 years, China's trade with emerging markets has surged at a faster speed than with developed countries and regions.

However, QE3 has many side effects for the global economy.

First, it increases imported inflationary pressure on China, therefore narrowing the room for monetary easing, which aims to stabilize growth.

China and other major emerging economies are subject to the principle of an open economy, but they don't have control over the international economic system. Their inflationary pressure is mostly imported through trade and capital flows.

Among the BRICS countries (Brazil, Russia, India, China and South Africa), QE3 would apply the most pressure on the monetary policies of India. As a country that has been mired in a trade deficit and current-account deficit for over 10 years, India is now experiencing capital flight. Capital outflows cause depreciation of the local currency against the U.S. dollar, which will in turn intensify capital flight. India is trapped in a vicious cycle. Also, capital inflows to India are mainly portfolio investments, making the cycling and fluctuation even more intense.

Due to the sharp depreciation of Indian currency against the U.S. dollar, prices of rupee-denominated primary commodities have been quite high despite the price falls of those dollar-denominated products in the international market since last year. Facing a high inflation rate, the Indian central bank has to choose between sustaining growth and curbing inflation, which are two highly contradictory targets in the country.

Worse still, in a bid to avoid an overall currency crisis, countries like India have to maintain a high interest rate and high reserve requirement ratio, or even further tighten monetary policies to attract portfolio investment inflows. This will deal a heavy blow to the real economy. Currently, QE3 is likely to raise the prices of dollar-denominated primary commodities, putting more pressure on India.

Second, after extremely loose monetary policies in Western countries, future tightening will cause large-scale capital flow reversal and a debt crisis. QE3 increases the pressure for this future risk. The more capital inflow that QE3 brings to emerging markets for the time being, the more capital flight pressure emerging markets will have to face in the future.

In all, QE3 will increase bubbles in primary commodities and some assets markets. We will face increased imported inflation and real estate bubbles and have to create a solid foundation for continuous economic growth to curb inflation and capital bubbles. Keeping this in mind, the Chinese Government should be more cautious about loosening monetary policies.

This is an edited excerpt of an article by Mei Xinyu, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, published in the National Business Daily