US told to ‘explain’ new monetary policy

A senior Chinese foreign affairs official said Friday that the United States should explain its latest round of quantitative easing, urging it to take a responsible attitude as a major reserve currency issuing country.

The US Federal Reserve (Fed) announced Wednesday that it would engage in a second round of quantitative easing, or QE2.

The Fed plans to purchase $600 billion worth of government bonds in a bid to revive the sluggish US economy.

The American central bank hopes this move will ultimately reduce the high unemployment rate that has plagued the economy since its crash two years ago.

This is the second round of such stimulus measures, after the Fed purchased $1.7 trillion worth of mortgage-backed securities and treasury notes between December 2008 and March 2010 aimed to keep the economy from plunging into another Great Depression.

“For the Fed’s new relaxed monetary policy, many countries have expressed worries about what impact it would impose on financial stability,” said Chinese Vice Foreign Minister Cui Tiankai at a news briefing.

“The US new monetary policy will affect not only emerging economies but also developed ones,” Cui said.

Cui’s comment came just ahead of the upcoming Seoul Summit, at which leaders of the G20 countries are expected to discuss a range of issues including trade, currency, financial regulation and reform of the international financial system.

Cui said he believed that the US move would likely lead to “spill-over effects,” which may eventually evolve into “flooding” if not restricted.

The new US monetary move has been widely criticised at home and abroad.

“The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilize the global economy,” Harvard University economist Martin Feldstein said in an article published by the Financial Times.

Paul Volcker, former US Federal Reserve chairman and current adviser to US President Barack Obama, called on the G20 leaders to resolve the currency issue at the Seoul Summit, but warned of future inflation due to QE2.

Volcker also said that QE2 would lead to massive capital inflows to emerging markets and create asset bubbles in them.

China maintains that the US loose currency policy will likely saddle China with imported inflation and flood its economy with hot money as foreign capital flows in.

“Macro-economic policy is not just a matter between China and the United States, but also affects the global economy,” said Cui.

“The Fed has the right to make its own decision … but they should not only address their economy, but also take into account the impact on other countries,” said Cui.

While urging the United States to “take a responsible attitude” as a major reserve currency issuing country, Cui quoted financial experts as saying that issuance of banknotes in a reckless manner was in fact a disguised form of currency manipulation.

Analysts said the US move was “logical” as it was striving to ease financial pressure, but emerging economies like China and Brazil should now gear up for an influx of capital.

“It is the US decision-maker’s logic to buy financial assets through issuing more currency in a bid to help financial institutions and companies,” said Li Daokui, a financial expert with Tsinghua University.

Li said the most urgent need now is to prevent the flow of cross-border “hot money” from impacting on the economy.

“The United States was sick but the other countries had to pay for the medicine,”said Zhou Shijian, an American studies expert with Tsinghua University, adding that China is the biggest victim of the new US fiscal policy among the emerging economies.

“The United States is doing something that benefits itself at the cost of others,” said Zhou.