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Ex-Chinese central bank governor Zhou Xiaochuan has warned about potential side effects from US money printing. Photo: SCMP

US money printing to fund deficit poses major risk for 2021, says ex-China central bank official

  • Zhou Xiaochuan, who led the People’s Bank of China between 2002-18, says modern monetary theory will have ‘side effects’
  • Global inflation, asset bubbles and the consequences of quantitative easing will be major issues next year, the economist says

A former Chinese central bank governor has warned there will be no free lunch following unprecedented money printing by the United States and blind faith in modern monetary theory, warning of potential side effects and labelling them as one of six major issues facing China and the world next year.

The comments by Zhou Xiaochuan, who led the People’s Bank of China (PBOC) between 2002-18, come as Beijing puts up higher barriers to protect the world’s No 2 economy from damaging capital flows and market turbulence, while at the same time stressing the importance of multilateralism.

Zhou called on the central government to uphold global cooperation, especially ahead of the Group of 20 (G20) summit in Rome next month, saying conflict in trade, finance and technology will hurt the interests of all nations.

Despite growing tensions between China and the US, President Xi Jinping has in recent years made efforts to portray China as torch-bearer for multilateralism, especially during the Trump administration’s “America First approach” to foreign policy and trade.

China doubled down on its commitment to multilateralism when it announced on Thursday it had formally applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade pact abandoned four years ago by the US.

“People have paid particular attention to every move of the US Federal Reserve and the discussions over modern monetary theory (MMT) that believes massive money printing to fund fiscal deficits will probably not generate side effects,” Zhou said on Wednesday at an event organised by the Boao Forum for Asia, a platform for China to explain its policies to the world.

“The Chinese proverb that pies fall from the sky generally refers to a kind of illusion. As for whether there will be free pies [following Fed policy] … we will see ourselves.”

Without naming China or the US, Zhou said he hoped global leaders would strengthen coordination against crises, enhance macroeconomic policy coordination, safeguard international trade rules and guarantee the stability of global supply chains.


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Recent meetings between G20 finance ministers and central bank governors have reached consensus on a number of international issues, including a global minimum tax and fighting the coronavirus pandemic. However, no concrete steps have been taken to coordinate monetary policy, with some economies such as Turkey, Russia and South Korea scrambling to raise interest rates.
The Federal Reserve’s balance sheet has doubled in size to US$8 trillion in the past 18 months as it rolled out support to offset the impact of the pandemic, and the loose macro stance looks set to continue with Biden’s US$550 billion infrastructure bill.

Some side effects of Washington’s unprecedented loosening have begun to emerge. For instance, US inflation hit a 13-year high of 5.4 per cent in July and only eased slightly to 5.3 per cent last month, far higher than the decades-old target of 2 per cent.

Zhou told the forum he regarded inflation, asset bubbles and the consequences of quantitative easing as major issues for next year, together with pandemic control, climate change, digital transformation and inequality.
High commodity prices pushed Chinese factory-gate inflation to a 13-year-high of 9.5 per cent last month, while surging shipping fees are exerting more pressure on the world’s top exporter.

China’s central bank has taken a different policy approach to its Western counterparts. After pumping trillions yuan into the economy to help contain the pandemic and support hard-hit businesses last year, it refrained from a larger stimulus and started to withdraw excess liquidity. Meanwhile, the firewall between the central bank and fiscal authorities was reinforced.

Zhou is not the first senior Chinese economic official to blast modern monetary policy. Sun Guofeng, head of PBOC’s monetary policy department, called MMT “specious” in an article last year.

“In essence, it is a seigniorage arrangement in which central banks pay government bills. It will impact the price system, distort economic decision making and mark the opposite direction against the goal of economic and financial stability,” he wrote.

Speaking at a press conference last week, PBOC deputy governor Pan Gongsheng insisted China would base monetary policy on domestic needs and increase policy support for weak links.


Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch

Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch

But authorities have also been paying close attention to cross-border capital flows, as the market expects the Federal Reserve to begin tapering bond purchases at the end of the year.

The external imbalances of the US will inevitably lead to a surge in some product or asset prices because of the dominant role of the US dollar, and bubbles could be formed if there is insufficient regulation, analysts have warned.

“As the reform of the international monetary system won’t be able to make substantial progress in the short term, enhancing capital control may be a policy choice to avoid imported financial crises,” Professor Fan Zhiyong, from the national academy of development and strategy at Renmin University, said at Wednesday’s online seminar.

Zhang Ming, deputy director of the institute of finance and banking under the Chinese Academy of Social Sciences, also expressed caution about MMT theory, saying it made central bank policy goals more diversified and weakened their independence.

China should make the yuan exchange rate more flexible and keep certain capital controls to deal with potentially abnormal money flows, he said at the seminar.

This article appeared in the South China Morning Post print edition as: ‘no free lunch’ as u.s. prints trillions