Nov. 16 (Bloomberg) -- China’s banking regulation chief joined Hong Kong’s leader in blaming the Federal Reserve’s interest-rate policy for fueling speculative capital flows that may spur asset-price inflation.

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.

Liu spoke two days after Donald Tsang, the chief executive of Hong Kong, said the Fed’s policy of keeping rates near zero risks sparking the next financial crisis. Fed Chairman Ben S. Bernanke has pledged to hold down borrowing costs for an “extended period” to secure a U.S. economic recovery.

Low rates and the dollar’s tumble have “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies,” Liu told reporters in Beijing at the International Finance Forum.

The debate over the Fed and asset prices comes years after some analysts criticized the U.S. central bank for holding down borrowing costs for too long in 2003 and 2004. Dallas Fed President Richard Fisher is among those who have said the Fed’s actions unwittingly contributing to the housing bubble.

Tsang ‘Scared’

“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., said yesterday that low borrowing costs in the U.S. have spurred a carry trade with some currencies, notably the Australian dollar after recent rate increases by that nation’s central bank.

“The carry trades will further drive down the dollar’s value and fuel commodity prices,” Zhao said. “The dollar’s depreciation has also caused excessive liquidity in the global market.”

In a currency carry trade, the investor makes money by borrowing in a country with low rates, converting the money to a currency where borrowing costs are higher, and lending the money at that higher rate.

Dollar Drop

The dollar fell against most of its major counterparts at the end of last week as a report showed the euro nations emerged from their worst recession since World War II, encouraging investors to buy higher-yielding assets.

The euro advanced for a second week against the dollar and approached its highest level since August 2008 before stalling just short of $1.5050. The dollar dropped for a third week against the yen, falling 0.2 percent to 89.66, from 89.88.

Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy.

U.S. Treasury Secretary Timothy Geithner reiterated his commitment to a “strong” currency on a trip to Asia last week. “It’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” he told reporters in Tokyo Nov. 11. He also underscored the U.S. intention of reducing budget deficits.

‘Biggest Influence’

“The dollar’s devaluation has the biggest influence on China among emerging market economies,” China Construction Bank’s Zhao said. “China has huge amount of investments in dollar assets; their safety is threatened.”

China is the biggest foreign holder of U.S. government debt, with almost $800 billion of Treasuries, in part a consequence of its controls on its currency. Premier Wen Jiabao’s government has sold yuan and bought dollars to keep his nation’s currency fixed around 6.83 per dollar since July 2008. It gained 21 percent in the previous three years.

President Barack Obama may discuss China’s currency during his visit to China, scheduled to begin late yesterday. Geithner said last week the region has shown a commitment to adopting “market-oriented” exchange rates.

China triggered speculation on Nov. 11 that the yuan may rise when policy makers dropped a pledge from their monetary- policy report to keep the currency “basically” stable.

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Last Updated: November 15, 2009 11:00 EST