Fed Bond Move Spurs Backlash From Asia To Europe

¹²Fed Bond Move Spurs Backlash From Asia To Europe

By The Associated Press | 7 November 2010

China's central bank chief Zhou Xiaochuan speaks at a business conference in Beijing, China, Friday, Nov. 5, 2010.

China, Germany and Brazil warned the Federal Reserve's move to inject money into the U.S. economy might harm the rest of the world, though Beijing said Friday the tactic was understandable because of the slow recovery. China's central bank chief Zhou said the debate about the Fed's attempt to spur growth by pumping $600 billion into the economy through purchases of Treasury bonds highlighted the need to reform the global financial system. Some governments worry the tactic, which will lower interest rates and is known as quantitative easing, might send money flooding into their markets seeking higher returns. That could push up exchange rates, hurting exports by making their goods more expensive.

The conflict might hamper efforts to fix strains in the global economy at next week's Group of 20 summit in Seoul. Leaders from the United States, Japan, Germany, China and other governments that account for 85 percent of the global economy hope to make progress on reducing trade and current account gaps. Some nations such as the U.S. buy far more than they sell to the rest of world while many developing countries including China run vast surpluses.

"If the domestic policy is optimal policy for the United States alone, but at the same time it is not an optimal policy for the world, it may bring a lot of negative impact to the world. There is a spillover," said Zhou Xiaochuan, governor of the People's Bank of China, speaking at a business conference. "We have to solve this problem by reforming the international currency system," he said, without giving details of possible reforms.

The Fed said it will make Treasury bill purchases over eight months in an effort to lower long-term interest rates and revive economic activity.

Germany Joins In The Criticism

"I don't think the Americans will solve their problems with this and I think they are creating extra problems for the world," Finance Minister Wolfgang Schaeuble told ARD television late Thursday. Brazil's finance minister, Guido Mantega, also criticized the Fed, saying Thursday its move would devalue the dollar and hurt Brazil and other exporters. He said bond-buying would not be effective without changes to stimulate domestic consumption.

Zhou said he understood the Fed's focus was on the U.S. economy and helping to create jobs while keeping inflation low.

"We have a slower recovery of the economy, high unemployment and low inflation. Under these circumstances, from that perspective, when we have a policy for a very low rate that is very close to zero, and for quantitative easing, it is reasonable. We can understand under current circumstances, of course," said Zhou. He was speaking at a conference organized by Caixin, a leading Chinese business magazine.

Zhou said Chinese central bank officials met regularly with their Fed counterparts, including Chairman Ben Bernanke, and the Americans gave detailed explanations for the monetary changes. Also Friday, a Chinese diplomat said Washington should act responsibly and give other governments a thorough explanation. "The international community has every reason to feel worried, so the U.S. side owes it a proper explanation for the move," Vice Foreign Minister Cui Tiankai told reporters.

The Philippine central bank said Thursday it would "remain vigilant" about the possible impact of the Fed's action. A bank deputy governor warned the money flows from the Fed's move might add to instability in emerging markets. Zhou said Beijing's controls on capital flows should shield China from a possible surge in speculative "hot money" triggered by the Fed's move.

Beijing keeps its financial markets isolated from global capital and tightly controls the exchange rate of its yuan, which has risen more slowly against the U.S. dollar than some Asian currencies such as the Thai baht. Zhou defended Beijing's decision to move gradually in easing currency controls despite U.S. and other foreign pressure to let the yuan rise faster. Beijing promised a more flexible exchange rate in June and has allowed the yuan to rise by 2.5 percent since then— far less than critics want. They say Beijing's controls keep the yuan undervalued and give China's exporters an unfair price advantage, swelling its trade surplus and costing jobs abroad.

Comparing policy changes to the multiple ingredients used to make traditional Chinese medications, Zhou said currency changes were part of a package of reforms including encouraging domestic consumer spending that would boost imports and narrow China's trade gap. "We do not want to emphasize that one ingredient will deliver a cure," he said.