Fed’s new stimulus plan worries global powers
The unrestrained issuance of US dollars could trigger another crisis, an adviser to China's central bank warned Thursday, shortly after the US Federal Reserve announced that it was pumping out more money to boost growth."As long as the world exercises no restraint in issuing global currencies such as the dollar - this is not easy - the occurrence of another crisis is inevitable, as quite a few far-sighted Westerners lament," Xia Bin, an adviser to China's central bank, said in a commentary on ftChinese.com that is managed by the central bank.
Developing countries must set up a firewall through currency and capital control to buffer itself from external shocks, Xia said.
The Federal Reserve said on Wednesday in a statement that it plans to buy an additional $600 billion of Treasuries by the end of the second quarter of 2011, at a pace of about $75 billion a month.
The move, known as a second round of quantitative easing (QE2), maintains interest rates near zero for an "extended period," and encourages banks to lend more.
The goal is "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate," the Fed's policy committee said.
However, some economists say the new policy will have a limited positive effect on the US economy and instead stir up inflationary pressures domestically and create a flood of cheap capital flowing to emerging economies, which will cause other problems elsewhere.
"There are serious concerns that when the US floods the world with dollars that find their way into equities, into stocks in Asia, whether in Hong Kong, Thailand or Indonesia, the effect of that on the local economies can be quite difficult to cope with," said Uwe Parpart, chief Asia economist in Hong Kong for US securities dealer Cantor Fitzgerald, quoted by Voice of America.
"The large amount of cheaper dollars coming into the country not only ignites inflation, but you always have to think that whatever comes in quickly can also be pulled out quickly," Parpart said.
Bulgaria's finance minister, Simeon Djankov, said Thursday that the Fed's move is likely to backfire and compromise the resolve of European countries in their austeriry drives.
Some countries are already planning measures to curb capital inflows in the wake of Fed's announcement.
South Korea's finance ministry warned Thursday of taking aggressive action to curb capital inflow, and Brazil's foreign trade secretary said the US move could cause "retaliatory measures."
Australia and India also raised interest rates to stay on top of inflation.
Michael Pettis, a Beijing-based finance professor and commentator with the Carnegie Endowment for International Peace, told the Global Times that the Fed's move is a result of limited options for the US to revive its economy.
"There are two targets of the QE2. One is to revive the economy; the other is to allow the US to regain control by putting pressure on the countries intervening. I think it's not the best way of doing so. But, the US is left with very limited options because the other countries are increasing their intervention in their economy," he said.
"If the US does nothing, the trade deficit will soar. It is risky to push forward the QE2, but it is less risky than doing nothing," he added.
Tan Yaling, head of the China Forex Investment Research Institute, told the Global Times that the US is taking advantage of its economic system to shift the pressure of its economic recovery to other countries.
"China should carefully examine and improve its own market system so as to cushion itself from external shocks," Tan added.
Zhao Xijun, deputy director of the Finance and Securities Research Institute at Renmin University of China, told the Global Times the Fed's move has two indirect impacts on China.
"It can fuel a price hike of commodities labeled in dollars, such as gold, oil and agricultural products, and increase the import costs of these commodities; its psychological impacts on China are also huge, as it can add to inflationary concerns in China," Zhao said.
Fed’s new stimulus plan worries global powers
</p> "The stimulus effect of the US Fed's move is very limited. The US should learn the lessons from its previous moves, ease its export restriction policies to reduce trade deficits and boost consumer confidence by adjusting structure, boosting its manufacturing industry and creating more jobs," he said.The Chinese stock market reacted to the US Fed's annoucement with shares on the Shanghai Composite Index climbing 1.9 percent Thursday.
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