Fed’s coronavirus response under fire from China as Beijing seeks to go its own way
- China wants ‘greater autonomy’ of macroeconomic policies, signalling it is keen to add stimulus even if the US Federal Reserve starts tapering bond purchases
- China’s central bank is worried that unprecedented US stimulus will lead to a surge in US inflation in contrast to the US Federal Reserve’s benign view
As US Federal Reserve officials gear up for the Jackson Hole symposium, their response to the pandemic is being criticised as risky by counterparts in Beijing who are trying to decouple China’s monetary policy from the United States.
The Communist Party’s Politburo has pledged “greater autonomy” of macroeconomic policies, signalling a willingness to add stimulus as China’s recovery loses steam even if the US Federal Reserve starts tapering bond purchases.
China’s central bank, though, is far more worried that America’s unprecedented stimulus since the coronavirus pandemic will lead to a surge in US inflation in contrast to the US Federal Reserve’s benign view.
That flood of foreign money increases the interdependence of monetary policy in the world’s two largest economies, because it could reverse if investors decide they can get better returns in America.
Previously, and as recently as 2016, Beijing could slam the brakes on any capital outflows with edicts capping or even banning them, but that was mainly to keep domestic money at home, not to trap global investors in.
Authorities now are reluctant to reverse their hard-won market opening, which is crucial to modernising the nation’s US$56 trillion financial sector.
So with stronger capital constraints now less likely, something else will have to budge if the quest for monetary autonomy means China adds stimulus even as the US Federal Reserve withdraws it. And that something, according to analysts, is the currency.
Depreciation would be risky, putting more pressure on already credit-strained Chinese companies with US dollar-denominated debt and also running the risk of a self-reinforcing cycle of capital outflows similar to what happened after a poorly communicated move to weaken the yuan back in 2015.
But the yuan is actually up 10 per cent from its trade-war low in September 2019, giving the People’s Bank of China (PBOC) more wriggle room.
The US faces the “most severe” inflation risks of any major economy due to the large deviation between the growth of its money supply and gross domestic product since the pandemic, the PBOC said recently in its quarterly monetary policy report.
“A large amount of currency will inevitably lead to inflation,” the PBOC’s quarterly report earlier this month said.
It added that the rapid growth in money supply would lead to “the destruction of financial discipline” and that the policies of the US Federal Reserve and central banks in Europe and Japan will bring damaging side-effects.
“Since the pandemic, developed economies have launched massive fiscal and monetary stimulus, which has not only added to inflation pressure but also led to asset price bubbles, leading to a deviation of financial market trends from the real economy and exacerbated fragility,” said the PBOC report.
“If the normalisation of major economies’ monetary policy picks up, that could trigger a correction in financial markets, and increase capital outflow pressures and currency depreciation in most emerging economies, leading to higher risks for debt repayment and refinancing.”
That reflects a common view among Chinese economists, who expect the US Federal Reserve will need to tighten much faster than their US peers predict.
In some respects, the monetary autonomy push mirrors the wider effort by Xi’s administration to decrease its reliance on the US for core technologies as it views Washington as an increasingly unreliable economic partner.
Some economists see Beijing’s recent moves to rein-in large Chinese technology companies from listing overseas as part of that ambition too.
Most high-level economic exchanges between the US and China have been suspended since the pandemic, complicating any prospect of synchronising policies.
The PBOC has not sent representatives to Jackson Hole in recent years and is not on the speaker list this year either.
“The perception gap about US inflationary risks could be the result of continued tensions and limited communication,” said Eswar Prasad, a former International Monetary Fund head in China, who is now at Cornell University.
The Jackson Hole topic this year is “Macroeconomic Policy in an Uneven Economy”. With the world’s two largest economies headed in different policy directions, that unevenness applies globally too.