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
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.
“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.
“There’s no free lunch,” Huang told a forum hosted by the National School of Development on Thursday. “We all remember what happened in 2014-15. The US [Federal Reserve] is the world’s major central bank. Once it quits quantitative easing and raises rates, we could encounter capital exodus, currency depreciation and falling asset prices. In some cases like South Africa, Russia and Turkey, it led to financial crisis. I don’t think such things will happen to China, but some emerging markets could face disastrous results.”
The US Federal Reserve conducted its loosest monetary policy in history after the 2008 global financial crisis, cutting interest rates to near zero while also engaging in three rounds of quantitative easing.
“That money will have to be taken back eventually,” said Wang Jun, chief economist at Zhongyuan Bank in Henan province, referring to a future tightening of US fiscal and monetary policy.
Given the risks the US liquidity injection poses, China is expected to dial back its efforts to open up its economy to more foreign capital inflows, and instead focus on relieving pressure on domestic markets and the yuan exchange rate.
“Considering the strong winds and big waves outside, it is no longer a good time to open up the capital account,” Wang added.
“[The effort to increase the use of yuan in international payments to replace the US dollar] is now receiving a higher priority … and outbound investment channels should be broadened.”
“This round of Fed loosening could drag the US dollar index into a cycle of weakness for many years, and it will have a continued impact on the yuan, capital flows, growth, consumer prices and trade,” said Xie Yaxuan, chief macro analyst with China Merchants Securities.
The central bank can use its countercyclical macroprudential policies to curtail short-term capital inflows, Xie added.
“The recent comments by [Chinese] policymakers suggest they have learned the lessons of Japan and the US and are set to tolerate greater fluctuations of the yuan exchange rate, and pay close attention to controlling asset prices and the macroeconomic leverage ratio,” Xie said.
Unlike the policy response after the 2008 global financial crisis, when both Beijing and Washington implemented large-scale stimulus to support their economies, China and the US are at different stages of their economic cycles and so their policies are quickly diverging.
Liu Shengjun, head of the Shanghai-based China Financial Reform Research Institute, said US fiscal and monetary policy moves have made it harder for Beijing to conduct its economic policy priorities, notably its process of gradually tapering off economic stimulus.
However, Liu said, “the psychological shock [of this] is bigger than the actual impact”.
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The expectation that larger stimulus will lead to stronger US and global recoveries this year have caused many organisations to also revise up their economic forecasts for China.
Swiss bank UBS raised its China gross domestic product (GDP) forecast for 2021 to 9 per cent from 8.2 per cent, driven by a strong domestic rebound and the US stimulus that should drive demand for Chinese exports.
International rating agency Fitch revised up its China GDP forecast for 2021 to 8.4 per cent this year from 8 per cent, citing a stronger outlook for global demand.