Austerity is no longer in the vocabulary of the Group of Seven rich countries. At their latest summit, the G7 leaders agreed that they were ready to spend their way out of the pandemic crisis. The Europeans and other English-speaking countries are set to follow Washington’s drastic fiscal expansion and stimulus. Where this will lead is anyone’s guess. Unwelcome hot money, though, is almost guaranteed to slip into developing economies, especially China’s. No wonder Beijing is worried. Chinese regulators and central bankers have been right to raise alarms about the fiscal responses of rich countries, which have increased inflation risks worldwide. The actions of some developed countries and their potential side effects do not inspire confidence. US President Joe Biden is pushing for an almost US$6 trillion stimulus package next year. The other G7 leaders have vowed to “carry on spending”. As pointed out by the China Banking and Insurance Regulatory Commission, inflation arrived almost immediately after the US Federal Reserve and European Central Bank began buying assets to cushion the negative economic impacts of the pandemic. A new bout of spending will pose a further threat, requiring tougher monetary policy from Beijing. This comes after the G7 meeting was turned into a China-bashing party. So, unlike the de facto policy coordination of the major central banks, including China’s, during the last financial crisis, this time there won’t be any collaboration. While the promise of massive fiscal stimulus has helped stabilise markets and the economy for now, any negative long-term effects will spread to other countries. If fiscal prudence is seen as being thrown out the window, inflationary expectations and jittery market responses may cause central banks to increase interest rates rapidly and excessively, thus triggering another financial crisis. Global action needed to rein in inflation The United States hopes to raise taxes on corporations and rich Americans to help fund the economic stimulus. The G7 has agreed to a global minimum tax to prevent big companies, especially the US tech giants, from exploiting jurisdictions with low-tax regimes. In this, the West needs China’s help, as the country has been a magnet for foreign hot money and investment. Dialling down the hostile rhetoric against China will help, too.