China warns that the west’s quantitative easing is inflationary

This comes via Bloomberg:

Global central banks risk inflation, currency devaluation and a “big consolidation” in bond markets by pumping cash into their economies, the People’s Bank of China said in its quarterly monetary policy report.

The Federal Reserve and the Bank of England this year started quantitative easing, or printing money to buy government bonds, a policy that the Bank of Japan pioneered to revive its economy at the start of the decade. The European Central Bank’s 22-member board, which meets tomorrow, is split on whether it should buy financial assets to tackle its recession.

“A policy mistake made by some major central bank may bring inflation risks to the whole world,” China’s central bank said in the report today. “As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.”

Chinese Premier Wen Jiabao expressed concern in March that the dollar will weaken, eroding the value of China’s holdings of Treasuries, as the U.S. borrows unprecedented amounts to spend its way out of recession. China’s Treasury holdings climbed 52 percent in 2008 and stood at about $744 billion as of the end of February, according to U.S. government data.

I don’t think you can take this statement as an idle comment from an anodyne central bank quarterly report.  All evidence suggests that China is legitimately concerned about a competitive devaluation in the U.S. and elsewhere as a result of easy money policies.  In my view China has long been preparing for this eventuality and is shifting money away from problem areas like the U.S. dollar (see my post “Breaking news: China has been secretly stocking up on gold”).  In addition, an Asia-centric dynamic does seem to be in its incipient phases. I mentioned this in a recent post “Asia is de-coupling,” suggesting that the $120 billion crisis fund set up by the Asian Development Bank was a move in that direction.

To be sure, it will take a very long time for the domestic demand within an Asian bloc to replace the export-oriented mercantilism we now see. But, you can definitely see the outlines of a push in that direction. And when one thinks back to the formalization of the Eurozone/EU, Mercosur or Nafta, I can see this developing over a number of years.  Generally, one should see this as a positive development because it will help end the unbalanced dynamic where the U.S. is the consumer of last resort to Asia’s producer of last resort.  The darker view of these developments is that the world is splitting into regional trading blocs in a new 21st century version of Smoot-Hawley.

Time will tell which view is accurate.

  1. Gary says

    “Global central banks risk inflation, currency devaluation and a “big consolidation” in bond markets”

    Can anyone explain what “big consolidation” means? Thanks

    1. Edward Harrison says

      Gary, basically it means bond markets are getting killed as the reflation trade takes hold.

      1. Gary says

        OK, thanks!

  2. aitrader says

    China is also lowering it’s purchase volume of treasuries and purchasing more short-term in lieue of long bonds (30 year).

    This has been the basis of my argument that the current “recovery” and “green shoots” are simply irrational exuberence, and my question as to just how the US is going to finance its huge deficits?

    It appears the US is printing money on one side to buy its own bonds on the other (Fed and Treasury). This is not just inflationary, it will likely destroy global confidence in the US dollar itself and jeopardizes its role as the reserve currency. The dollar’s role in world trade is critical and a collapse in confidence in it portends a global trade catastrophe.

    I think I have harped on the situation of multiple competing fiat “reserve” currencies with no backing of any kind trying to fund global trade. I see things degenerating into barter trade where one set of goods sitting on a ship somewhere is exchanged for another somewhere else because no stable currency of exchange exists. This will be a humdinger collapse in the volume of global trade and will give shipping companies with global reach a near monopoly over certain trade goods sold in local currencies.

    As von Mises said, there is no way to gauge marginal utility without a neutral currency as measure desired by both parties. It will be interesting to see what/if this situation brings if it does in fact occur.

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