The central banks of Japan, the United Kingdom and the European Union have promised to maintain their current policies, but this has not alleviated risks for a currency war, analysts say.

Given that Haruhiko Kuroda, the nominee for Japan's central bank chief, advocates a looser monetary policy to fight deflation, the market expects Kuroda to take aggressive easing action after he takes office in April.

In the United States, a contraction in the Federal Reserve's asset purchase program will not come any time soon, as Fed Chairman Ben Bernanke has repeatedly signaled that the US central bank will maintain quantitative easing until there is a substantial improvement in the labor market outlook.

Zong Liang, deputy chief of the Strategic Planning Research Institute under the Bank of China, said a currency war is brewing as the global economy continues its struggle to recover.

"What the world will encounter may not be a head-on currency confrontation by major economies, like in the Great Depression of the 1930s. But a competitive currency devaluation will come in a stealthy way," said Zong.

Liu Junhong, director of the Globalization Center with the China Institutes of Contemporary International Relations, named Japan as a possible powerhouse of competitive currency devaluation.

Since Shinzo Abe assumed his role as Japan's prime minister two months ago, the Japanese yen has depreciated more than 15 percent against the U.S. dollar.

Liu says Japan's central bank may purchase more assets, including stocks, government bonds, corporate bonds and commercial bills, and advance its open-ended asset purchase programs to beat deflation.

The Federal Reserve is another policy weathervane. It will look to American economic growth to decide whether or not to contain its quantitative easing, according to Liu Jisen, deputy secretary-general of the Guangdong Research Institute for International Strategies.

In Europe, the grim outlook of the sovereign debt problem has also boosted market expectations for looser monetary policies.

A WAR WITH NO WINNERS

At the ongoing annual session of the 12th National People's Congress, China's parliament, Commerce Minister Chen Deming warned that any major depreciation in the world's major currencies -- the Japanese yen, the US dollar and the euro -- will mean trouble for China and other emerging economies.

"When quantitative easing policies are being adopted, policy makers must consider the spillover effect of their policies and avoid severe currency devaluation," Chen said.

Yi Gang, deputy governor of the People's Bank of China (PBOC), China's central bank, also called on currency policymakers in the world's major economies to observe a consensus reached at a G20 meeting held last month and refrain from engaging in competitive currency devaluation.

"There is no winner in a currency war," said Yi.

Justin Yifu Lin, a professor at Peking University as well as the former chief economist of the World Bank, warned that the quantitative easing policies of developed countries could stimulate the flow of short-term speculative capital and shore up the currencies of developing countries.

"The RMB would get stronger if the world's major developed economies continued to push ahead with a looser monetary policy," Lin said in a group interview on the sidelines of the legislative session.

Lin, who is also a Chinese political advisor, added that the International Monetary Organization has revised a policy to allow a country to impose emergency capital controls to combat a drastic inflow of short-term speculative capital, enabling that country to avoid rapid currency appreciation and prevent bubbles from being created in local real estate and stock markets.

HOT CAPITAL INFLOW

The latest figures from China's central bank show that Chinese financial institutions saw their yuan funds outstanding for foreign exchange increase by 683.7 billion yuan ($108.9 billion) in January, the highest monthly increase on record.

Zuo Xiaolei, chief advisor to the president of China Galaxy Securities, said the new record signalled potential for hot capital inflow for an arbitrage on a stronger yuan.

China's improving economic prospects and the current low-interest rate environment created by the quantitative easing policies of developed countries have raised expectations for an appreciating yuan, said Zuo.

According to the government work report delivered by Premier Wen Jiabao on March 5, China's central bank expects the broad money supply (M2), which covers cash in circulation and all deposits, to expand by just 13 percent this year, compared to forecasts of 16 percent in 2011 and 14 percent in 2012.

Tan Yaling, director of the China Forex Investment Research Institute, said the year's forecast indicates that the Chinese government is already alert to market liquidity.

China's M2 rose 15.9 percent year on year to about 15.8 trillion US dollars at the end of January, compared with 10.4 trillion US dollars in outstanding M2 in the US, data from the Chinese and US central banks show.

Zhou Xiaochuan, governor of China's central bank, explained that China's M2 would expand relatively quickly at the beginning of the year due to the Spring Festival holiday season.

"I can't tell whether we can achieve the expected 13-percent growth in M2 or not, it all depends on developments in the coming months," he said on the sidelines of the legislative session.

Yu Yongding, a former monetary policy advisor to the PBOC, said he expects the central bank to tighten its broad money supply. "China will undoubtedly face greater inflationary pressure in 2013 than last year, so the central bank needs to do something."

TRADE DISADVANTAGE

To ward off a stronger RMB's negative impacts on trade, economist Li Yining, also a political advisor, proposed that the government should speed up industrial upgrading and independent innovations to export more competitive goods

China must also facilitate the optimization of its economic structure for healthier development, as well as encourage the rational use of foreign exchange reserves for imports and overseas investment, said Li, a member of the the Chinese People's Political Consultative Conference (CPPCC) National Committee, China's top political advisory body.

Preserving trade advantages through currency devaluation, by contrast, will inundate the money market with liquidity, creating asset bubbles, elevating inflationary pressure and resulting in a volatile foreign currency market, he said.