Thursday, May 7, 2009

A policy mistake made by some major central bank may bring inflation risks to the whole world

TO BE NOTED: From Alphaville:

Quote du jour: fears of competitive devaluation

A policy mistake made by some major central bank may bring inflation risks to the whole world. As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.

- People’s Bank of China quarterly report, May 6 (via Bloomberg)

The PBC has been getting gradually more vocal in its criticisms of the Fed and the BoE. Things cant be great if you’ve got a mountain of US Treasuries, of course.

We’ll be watching to see what the BoE has to say about QE - if anything - at noon.


"China Says Global Easing Policies Risk Devaluation (Update2)

By Sandy Hendry

May 6 (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.

“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.

“In the medium and long term, as the financial markets stabilize and economies gradually recover, increasing inflation expectations, rising interest rates and central bank’s liquidity-absorbing operations may cause a ‘big’ consolidation in bond prices,” the central bank’s statement said.


Federal Reserve Chairman Ben S. Bernanke told the congressional Joint Economic Committee yesterday that inflation will “remain low” even as a recovery gets underway because businesses will be slow to build back production and payrolls.

ECB council member Athanasios Orphanides yesterday said the financial crisis needs “drastic” measures. Orphanides and fellow member George Provopoulos from Greece have indicated they may support cutting the target rate to less than 1 percent and buying debt to pump money into the economy.

ECB Executive Board member Lorenzo Bini Smaghi said on April 28 that policy makers should be “wary of the possible side-effects” of unconventional measures.

The euro may rise against the dollar because ECB policy makers will probably decide against introducing so-called quantitative easing when they meet May 7, Bank of Tokyo- Mitsubishi UFJ Ltd. said.

“The failure to move to quantitative easing in the near term should help support the euro, especially against the dollar, given the Federal Reserve’s contrasting aggressive monetary easing approach,” Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo, wrote in a note yesterday.

To contact the reporter on this story: Sandy Hendry in Hong Kong at"


Don the libertarian Democrat May 7 15:08
I keep quoting this speech, which pretty much details China's position on QE in a financial crisis:

"2. The role and contribution of China, as a responsible big country, in Asian financial crisis

In order to mitigate the impact of Asian financial crisis and help crisis-stricken Asian countries walk out of the plight, then China's Premier Zhu Rongji promised, on behalf of the Chinese government, to the world that the RMB would not depreciate, followed by a series of active measures and policies.

(1) China made vigorous efforts to participate in the IMF's rescue operations to help related Asian countries. After the outbreak of financial crisis, under the arrangement framework of the IMF, the Chinese government provided a total of over US$4 billion assistance to Thailand, as well as export credit and emergency free medicine assistance to Indonesia and other East Asian countries, although China had inadequate foreign exchange reserves at that time.

(2) China actively cooperated with relevant parties to participate in and advance regional cooperation. At the sixth ASEAN informal leaders' meeting, then China's President Jiang Zhemin unveiled three proposals of strengthening regional cooperation to refrain the crisis from spreading, reform and improve international financial system, and respect self-selected measures of relevant countries and areas to overcome financial crisis. At the second informal ASEAN+China, Japan and Korea leaders' meeting and the informal ASEAN+China leaders' meeting, then Vice President Hu Jintao emphasized that East Asian countries should vigorously engage in reform and adjustment of financial system, with the most pressing need to intensify the management and supervision over short-term capital flow. He called on the East Asian countries to strengthen exchange on macroeconomic issues such as financial reform, have dialogue between deputy finance ministers and deputy governors of central bank, and form expert team at appropriate time to launch in-depth research on specific measures on managing short term capital flow. The above measures adopted by the Chinese government received positive response and support from most crisis-stricken countries.

(3) China promised that the RMB would not depreciate. Being a highly responsible country, the Chinese government made the decision of no depreciation of the RMB with an aim of safeguarding regional stability and promoting development, which played a pivotal role in maintaining economic and financial stability of the Asian countries and the world at large, as well as Asian countries' economic recovery and regaining of rapid growth in later years.

(4) China implemented policies to boost domestic demand and stimulate economic growth. While sticking to no depreciation of the RMB, the Chinese government took a wide range of measures to boost domestic demand and stimulate economic growth, which safeguarded health and stability of domestic economic growth, mitigated difficult situation in the Asian economies, and fueled recovery of Asian economy.

The adoption of these measures by the Chinese government embodied that as a part of Asia, China had a full awareness of collective interests and responsibility and has made its due contribution to the rapid recovery and regaining of growth momentum of the Asian economy."

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