China, US share inflation risks that will not go away soon, their former top finance officials agree

Beijing has an opportunity to cooperate with Washington on infrastructure and green investments in the post-coronavirus era, but both superpowers are currently preoccupied with tackling global inflation caused by government monetary and fiscal stimulus policies, a panel discussion between two former finance ministers has heard.

During his online exchange with former US Treasury secretary Lawrence Summers, former Chinese finance minister Lou Jiwei expressed a desire for Beijing to work with Washington, saying “trade protectionism and deglobalisation” were “no good to all of us”.

A full video of the panel discussion, hosted by the Beijing-based Global Asset Management Forum in late July, was released on Tuesday.

“The US, indeed, needs to push forward infrastructure construction,” said Lou, who now heads the Committee for Foreign Affairs under the Chinese People’s Political Consultative Conference (CPPCC).

Lou is also an outspoken member of China’s pro-reform camp who has sounded alarms about national debt risks and has criticised China’s financial regulators.

He spoke to the fragility of American power grids, as seen when storms knocked out power to millions of people in Texas earlier this year. And he pointed to areas such as new energy vehicles and their accompanying charging stations.

“In those areas, our two countries can cooperate,” Lou said.

His counterpart Summers, who was Treasury secretary during the Bill Clinton administration, said he broadly supported President Joe Biden’s infrastructure plan and was not concerned with the corresponding rise in debt.

However, he did not respond to Lou’s call for bilateral cooperation.

The Biden administration has not engaged in official negotiations with Beijing over infrastructure partnerships, despite several virtual conferences on trade in the past two months.

The two countries remained embroiled in bilateral disputes concerning alleged human rights abuses in China’s Xinjiang, Hong Kong and the origin of the coronavirus.

Tensions ratcheted up a notch after US Secretary of State Antony Blinken said on Tuesday that the US needs to invest more heavily in education, roads, railways, ports and broadband to remain globally competitive against China.

The US Senate approved a US$1 trillion bipartisan infrastructure bill on Tuesday.

During their panel chat, Lou and Summers also shared concerns over rising global inflation.

New data from the National Bureau of Statistics this week show factory-gate price inflation in China remains high.

The producer price index (PPI), which reflects the prices that Chinese factories charge wholesalers for their products, rose by 9 per cent in July from a year earlier, up from a gain of 8.8 per cent in June, the National Bureau of Statistics said.

Meanwhile, inflation is being felt at the consumer level in the US. Consumer price inflation surged at its fastest pace in nearly 13 years in June, and July’s report card is expected to reveal much of the same when it comes out on Wednesday.

Although loose fiscal and monetary policies were critical in curbing economic contraction during the pandemic, they could lead to an ongoing rise in commodities prices and inflation pressures, even after fiscal spending tapers off, Lou said.

The use of monetary policy to support growth is a difficult balancing act, Lou added.

“There could be inflationary risks if the [monetary] quantitative easing policy exits too late, while other risks such as rate hikes could emerge if it ends too early. The timing [of policy tapering] is very important,” he said, estimating that the Federal Reserve is likely to downsize its asset purchases next year before starting to raise interest rates.

Summers shared similar concerns about the inflation conundrum, and he sees inflation continuing.

He said if quantitative easing policies were ended too late, there could be a risk of ongoing inflation, but if it ended too early, it could cause other problems such as rising interest rates.

“I do have considerable concerns about inflation over the medium term in the United States,” Summers said. “I think the risks of a significant increase in the underlying inflation rate in the United States are quite significant. I think we are at much greater risk that quantitative easing will be ended too late.”

China’s second-quarter monetary policy implementation report, released on Monday, also flagged concerns over inflation.

“We’ll enhance the monitoring and analysis of uncertain factors such as fiscal revenue, government bond issuance and the monetary policy adjustments of major economies, to make our policies more forward-looking, flexible and effective,” the central bank said, adding that it would support China’s economy while avoiding a “flood-like” stimulus.

The importance being placed on managing inflation has manifested itself in China’s recent monetary policies.

For instance, the central bank, which had planned on tapering its stimulus, announced a surprise cut of the reserve requirement ratio on commercial banks a month ago, releasing 1 trillion yuan (US$154 billion) worth of liquidity into the interbank system on Thursday with an aim of supporting small Chinese businesses with more credit.