Fed policy sparks Chinese criticism as PBOC goes its own way

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As Federal Reserve officials prepare for the Jackson Hole symposium, their response to the pandemic is criticized as risky by their counterparts in Beijing who are trying to decouple China’s monetary policy from the United States

The Communist Party politburo has promised greater autonomy in macroeconomic policies, signaling a willingness to add stimulus measures as China’s recovery falters even as the Fed begins to cut its bond purchases.

Meanwhile, China’s central bank is far more concerned that the unprecedented stimulus measures in the Americas since the pandemic will lead to a spike in US inflation than the Fed’s benign view.

The openness of China’s financial sector and the outperformance of its economy during the pandemic triggered an unprecedented inflow of global capital into its asset markets. This flow of foreign money increases the interdependence of monetary policy in the world’s two largest economies, as it could reverse if investors decide they can get better returns in America.

Before, and no later than 2016, Beijing could curb any outflow of capital with decrees capping or even banning them. But it was mainly to keep the national money at home, not to trap global investors. The authorities are now reluctant to undo their hard-won market opening, which is crucial to modernizing the country’s $ 56 trillion financial sector.

So, with stronger capital constraints now less likely, something else will have to move if the quest for monetary autonomy means that China is adding a stimulus even as the Fed withdraws it. And that something, analysts say, is money.

China can use the exchange rate to deal with external pressure, said Larry Hu, Chinese economist at Macquarie Group Ltd. If the dollar strengthens, the yuan may weaken to absorb the shock.

Depreciation would be risky, putting more pressure on already credit-strapped Chinese companies with dollar-denominated debt and also risking a self-reinforcing cycle of capital outflows similar to what happened after a move poorly communicated to weaken the yuan in 2015 But the yuan is actually up 10% from its trade war low in September 2019, giving the PBOC more leeway.

The story continues

Fed criticism

The United States faces the most severe inflation risks of any major economy due to the large gap between its money supply growth and GDP growth since the pandemic, the People’s Bank of China recently said in its quarterly report on monetary policy. On Tuesday, PBOC Governor Yi Gang said the goal was to match money supply expansion with nominal economic growth.

A large amount of currencies will inevitably lead to inflation, according to the PBOC’s quarterly report of August 9. He added that the rapid growth of the money supply would lead to the destruction of financial discipline and that the policies of the Fed and central banks in Europe and Japan would lead to damaging side effects.

Since the pandemic, developed economies have launched massive fiscal and monetary stimulus measures, which have not only increased inflationary pressure, but also led to asset price bubbles, causing financial market trends to deviate from relative to the real economy and exacerbating fragility. If the normalization of monetary policy in major economies accelerates, this could trigger a correction in financial markets and increase pressures on capital outflows and currency depreciation in most emerging economies, leading to increased risks of debt repayment and refinancing.

– Quarterly report on PBOC policy

This reflects a common view among Chinese economists, who expect the Fed will have to tighten much faster than their US peers predict.

If the bubble in the US economy bursts after the pandemic, it will bring huge shocks to the global and Chinese economy. We must prevent and prepare for this scenario, said Liu Yuanchun, vice president of Beijing Renmin University who was part of a group of economists consulted by President Xi Jinping last year.

In some ways, the push for monetary autonomy mirrors the Xis administration’s broader effort to reduce its dependence on the United States for basic technologies, as it views Washington as an economic partner of the United States. less and less reliable. Some economists see in this ambition the recent measures taken by Beijing to prevent large Chinese technology companies from registering abroad.

Most high-level economic exchanges between the United States and China have been put on hold since the pandemic, complicating any prospect of policy synchronization. The PBOC has not sent representatives to Jackson Hole in recent years, nor is it on the list of speakers this year.

The perception gap on U.S. inflationary risks could be the result of lingering tensions and limited communication, said Eswar Prasad, former director of the International Monetary Fund in China now at Cornell University.

The subject of Jackson Hole this year is macroeconomic policy in an unequal economy. With the world’s two largest economies running in different political directions, this inequality also applies globally.

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