Chinese Vice Finance Minister Zhu Guangyao said the U.S. Federal Reserve’s decision to pump $600 billion into the economy might “shock” emerging markets by flooding them with capital.
The first round of quantitative easing, as the Fed policy is termed, in 2009 was justified because the global economy lacked liquidity, Zhu told reporters in Beijing today. With a recovery now under way, new purchases of Treasuries to inject funds into the financial system may be destabilizing, he said.
“Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,” Zhu said. The U.S. “has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.”
Zhu’s comments underscore concern around the world that the Fed’s decision will benefit the U.S. at the cost of stability and growth elsewhere. Chinese and European leaders have said they plan to discuss the impact of quantitative easing at the Group of 20 summit this week in Seoul as well as the dangers of competitive currency devaluations.
German Finance Minister Wolfgang Schaeuble compared the Fed move to China’s currency policy, which involves hundreds of billions of dollars in U.S. dollar purchases to prevent rapid appreciation of the yuan. “The instruments are different but the goal is the same,” he said in a Nov. 5 speech in Berlin.
“This is a U.S. countermove in the global beggar-thy-neighbor process,” said Michael Pettis, a finance professor at Peking University and a former managing director at Bear Stearns Cos.
Brazilian Trade Minister Welber Barral said Nov. 3 that Latin America’s biggest economy is “concerned” with the new quantitative easing, also calling it a ‘beggar-thy-neighbor policy,’’ a term used to describe a policy where a country seeks gains at the expense of others. The U.S. was pursuing a “weak-dollar policy,” Japan’s Prime Minister Naoto Kan said on Nov. 4.
“The international financial markets do not lack capital, what is lacking now is confidence,” Zhu said.
Yet the Fed’s policy has also brought out competing viewpoints in the Chinese government, even within single ministries. Wang Jun, like Zhu a vice finance minister, said at a finance ministers meeting in Kyoto Nov. 6 that a “quantitative easing policy that’s aimed at boosting the U.S. economy will help the revival of the global economy tremendously.”
Zhu, speaking today, echoed comments made by Vice Foreign Minister Cui Tiankai on Nov. 5, who said the Fed “owes us some explanation on their decision on quantitative easing.”
“At this point we believe the United States has not fully realized its responsibility to stabilize global financial markets as a main reserve currency issuing country,” Zhu said.
While Zhu focused his concern on the impact of the Fed’s easing policy on developing economies, quantitative easing may also make it harder for some European countries to repay their debts, Nobel Prize-winning economist Robert Mundell said in a Nov. 3 interview in Beijing.
Quantitative easing is “terrorizing” the world economy and will lead to depreciation of the U.S. dollar, pushing down prices in Europe and exacerbating the continent’s sovereign debt crisis, Mundell said.
The European Central Bank’s mandate to control inflation would likely hamper it from stemming the euro’s rise, while the currency’s gains would “likely lead to deflation,” said Mundell, who received the prize in 1999 and is known as the intellectual father of the euro. Falling prices would increase “the real value of indebtedness.”
China needs to stop hot money from entering the nation to prevent a “crisis,” independent economist Andy Xie said at a forum in Beijing today.
Smaller economies have raised concerns about the inflow of capital driving currencies, stocks and property prices higher.
The Taiwan dollar is close to its strongest since 1997, capped by suspected government intervention. South Korea’s government said it would curb volatility in the foreign-exchange market caused by speculative fund flows. Hong Kong’s Financial Secretary John Tsang said last week that the government “will not hesitate” to curb asset price inflation.
Copper on the London Metal Exchange has gained 25 percent in the past six months, and silver futures traded in New York are up 44 percent.