American Rescue Plan: China increasingly concerned by US economic policy after Fed maintains loose stance

US Federal Reserve repeated it would keep its benchmark interest rate near zero and continue sizeable asset purchases to pump liquidity into financial markets

Last week, the US$1.9 trillion American Rescue Plan was also signed into law following the previous US$900 billion stimulus plan passed in December

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The US Federal Reserve’s continued loose monetary policy under chair Jerome Powell has been coupled with a huge injection of US government funding into the economy. Photo: Getty Images

Published: 12:30am, 19 Mar 2021Updated: 1:29am, 19 Mar 2021

Moves by the United States to maintain its loose monetary policy until at least the end of 2023 to support its economic recovery and labour market have reinforced concerns in Beijing as it tries to reduce the risk of domestic asset bubbles by gradually tapering off stimulus policies enacted last year.

The US Federal Reserve on Wednesday reiterated that it would keep its benchmark interest rate near zero and continue sizeable asset purchases to pump liquidity into financial markets, in a so-called quantitative easing.

Chinese economic advisers, though, are increasingly worried that some of the tidal wave of cash released into the market by the US will produce unexpected shocks in domestic financial markets.

As a result, Chinese authorities are likely to slow the opening of its capital account for fear of massive “hot money” inflows, and instead focus on increasing outbound investment flows and greater overseas use of the yuan for financial transactions as international policy coordination is seen as highly unlikely in the short term, analysts said.

What worries me the most is the next adjustment of Fed policies

Huang Yiping

“What worries me the most is the next adjustment of Fed policies,” said Huang Yiping, a former central bank adviser and now deputy dean of Peking University’s National School of Development.

Huang expressed the concern shared by some in the global financial markets that the massive US economic stimulus will lead to a rapid recovery of the American economy and force the US Federal Reserve to raise interest rates sooner than it now expects. That fear among some international investors has been one of the key driving forces in the sharp rise in US bond yields in recent weeks.

“These measures, along with our strong guidance on interest rates and on our balance sheet, will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” said US Federal Reserve chair Jerome Powell.