CHINA SAYS FED POLICY THREATENS GLOBAL RECOVERY / THE FINANCIAL TIMES ( RECOMMENDED READING )

China says Fed policy threatens global recovery

By Geoff Dyer in Beijing and Kevin Brown in Singapore

Published: November 15 2009 16:02

The US Federal Reserve is fuelling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned on Sunday just hours before President Barack Obama arrived in China for his first visit.

Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”.

The comments came as China and the US sparred at the Asia Pacific Economic Co-operation summit in Singapore over exchange rate policies amid rising international criticism that China’s currency is undervalued.

Mr Liu’s unusually blunt remarks underscore how China – the largest US creditor because of its massive holdings of Treasury bonds – has become a trenchant critic of monetary and fiscal policy in the US.

Since the start of the financial crisis, Chinese officials have issued a number of warnings that the US should not inflate away its mounting debt burden. Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

“[It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets,” said Mr Liu, who is chairman of the China Banking Regulatory Commission.

“The situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices,” he added.

However, Mr Liu’s criticism of the Fed comes as China’s own monetary policy is attracting growing scrutiny at home and abroad. Critics say the massive expansion in bank loans this year could cause asset price bubbles and inflation.

Qin Xiao, chairman of China Merchants Bank, last month said China “urgently” needed to tighten monetary policy to avoid stock and property market bubbles.

On Monday, Dominique Strauss-Kahn, the head of the International Monetary Fund, said a stronger Chinese renminbi was part of the reforms that Beijing needed to implement in order to increase domestic consumption and help ease global imbalances.

In remarks prepared for a financial conference in Beijing, Mr Strauss-Kahn also said he expected the dollar to remain the principal reserve currency ”for some time”, Reuters reported.

At the Apec meeting in Singapore, the final communiqué from the 21 members was delayed as Hu Jintao, the Chinese president, called successfully for the removal of a reference to the desirability of “market oriented exchange rates that reflect underlying economic fundamentals”.
In a surprise move, the reference had been included in a statement by Apec finance ministers on Thursday, in spite of China’s unwillingness to discuss the issue. Mr Hu ignored the issue in both his speeches and earlier contributions to the Apec debates.
Officials confirmed that it had also been included in the final leaders’ statement, but was removed after a discussion between the US and Chinese leaders.

Lee Hsien Loong, the prime minister of Singapore and Apec summit chairman, did not confirm China’s role in changing the wording of the statement.

But he said some countries were concerned of the possibility of some currencies becoming unstable, and the problem that could arise if governments “had to intervene continually in order to manage their currencies”.

Copyright The Financial Times Limited 2009