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China Warns That The West’s Quantitative Easing Is Inflationary

 May 06, 2009 10:35 AM

This comes via Bloomberg:

Global central banks risk inflation, currency devaluation and a "big consolidation" in bond markets by pumping cash into their economies, the People's Bank of China said in its quarterly monetary policy report.

The Federal Reserve and the Bank of England this year started quantitative easing, or printing money to buy government bonds, a policy that the Bank of Japan pioneered to revive its economy at the start of the decade. The European Central Bank's 22-member board, which meets tomorrow, is split on whether it should buy financial assets to tackle its recession.

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"A policy mistake made by some major central bank may bring inflation risks to the whole world," China's central bank said in the report today. "As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies' devaluation risks may rise."

Chinese Premier Wen Jiabao expressed concern in March that the dollar will weaken, eroding the value of China's holdings of Treasuries, as the U.S. borrows unprecedented amounts to spend its way out of recession. China's Treasury holdings climbed 52 percent in 2008 and stood at about $744 billion as of the end of February, according to U.S. government data.

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I don't think you can take this statement as an idle comment from an anodyne central bank quarterly report.  All evidence suggests that China is legitimately concerned about a competitive devaluation in the U.S. and elsewhere as a result of easy money policies.  In my view China has long been preparing for this eventuality and is shifting money away from problem areas like the U.S. dollar (see my post "Breaking news: China has been secretly stocking up on gold").  In addition, an Asia-centric dynamic does seem to be in its incipient phases. I mentioned this in a recent post "Asia is de-coupling," suggesting that the $120 crisis fund set up by the Asian Development Bank was a move in that direction. 

To be sure, it will take a very long time for the domestic demand within an Asian bloc to replace the export-oriented mercantile we now see. But, you can definitely see the outlines of a push in that direction. And when one thinks back to the formalization of the Eurozone/EU, Mercosur or Nafta, I can see this developing over a number of years.  Generally, one should see this as a positive development because it will help end the unbalanced dynamic where the U.S. is the consumer of last resort to Asia's producer of last resort.  The darker view of these developments is that the world is splitting into regional trading blocs in a new 21st century version of Smoot-Hawley.

Time will tell which view is accurate.



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