Money printing in developed economies worries China

17:10, November 03, 2010      

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The prospect of more liquidity flooding into the emerging markets due to the further relaxation of monetary policy in developed economies is causing concern in China, which is already under pressure of expectation of long term inflation.

The People's Bank of China, the central bank, warned in its report on Nov. 2 that enormous capital may flood into fast-growing emerging economies from developed economies, which are apparently poised to launch more stimulus actions to battle stagnation. As a result, emerging economies are facing mounting pressure of inflation and capital influx.

There are strong expectations on the market that the U.S. Federal Reserve will declare the second round of quantitative easing on Nov.4 after its two-day meeting.

The U.S. policy, once adopted, is "understandable" as it is designed to power the U.S. economic recovery, but that will lead to hot money flooding into other economies and cause pressure of local currency appreciation there, said Li Daokui, a Chinese economist and member of the Central Bank's Monetary Policy Committee.

Bank of Japan has declared recently it will retain its 0.1 percent interest rate and probably expand its asset purchase efforts if necessary to boost its economic recovery. Some analysts believe that the already strong Japanese yen could be pushed even higher by the Fed's quantitative easing, which would certainly hit the Japanese economy even harder. If this situation were to occur, Japan would have to do something to deal with it.

Britain and the euro zone will also announce the next step for their monetary policy soon, which will be affected by the Fed’s decision.

China has been wary about hot money inflows. The State Administration of Foreign Exchange, China's foreign exchange regulator, has recently repeatedly reiterated its determination on blocking hot money and stepped up efforts on cracking down on fraud in foreign exchange deals.

The trend toward further relaxing monetary supply in major economies contrasts sharply with the emerging economies’ efforts to tighten their monetary policy in the context of their inflationary problems. Australia and India have already both declared interest rate hikes on the same day — Australia by 25 basis points to 4.75 percent and India also by 25 basis points to 6.25 percent.

Emerging economies could probably see their prices rise robustly to 6.2 percent in 2010 and 5.1 percent in 2011, much higher than those in developed economies, according to the PBOC report.

Keeping prices at a stable level will be high on the agenda of China's central bank, according the report. In its another report on China’s macro-economic situation released recently, the central bank warns that rising grain prices, further reform of the resources pricing system and the uncertainties about commodity prices on the international market all combine to add upward pressure on prices in China.

There seems to be wide consensus that China's consumer price index, the indicator of inflation, will peak in October but will be controlled at well below 3.5 percent for the whole year. But the inflationary pressure is expected to stay much longer even when the CPI is down. Given that, China’s central bank has highlighted the importance of more efforts to reign in inflation expectations while it confirmed continued implementation of a moderately loose monetary policy.

That inflationary pressure is fueling expectations of interest rate hikes. Even the World Bank said today that China would need to increase its interest rate further. Some economists are echoing the World Bank’s suggestion. According to a report yesterday by Economic Information under Xinhua News Agency, Qu Hongbin, HSBC’s chief economist for China, and Lu Zhengwei, a senior economist with Industrial Bank, both see the possibility of more interest rate hikes within the year.

But others are cautious about when that would happen. Zhao Xijun with Beijing-based Renmin University said that by indicating that it intends to gradually normalize monetary policy, China believes its economy is in good operation and recovering to the position it held years before the global Financial Crisis.

However, he thinks it takes time for China to be back to normal after two years of implementation of stimulus-oriented monetary policy, and there is no timetable for that process.

Zhao Qingming, a senior researcher with Construction Bank of China, agrees that more careful consideration and observation are needed before any judgment can be made on whether a new round of interest rate hikes is imminent. He pointed out that growth and employment have been put on the higher agenda of China's monetary policy than price stability and balanced international payment.

Interest hikes will only happen when the existing purposes of monetary policy are changed and focus is placed on price stability. However, whether that change will take place soon is still subject to further observation, he concluded.

By Li Jia, People’s Daily Online


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