China newspaper warns of disaster over Fed move

Washington's latest move to print more money is a form of indirect currency manipulation that could lead to a new round of currency wars and even global economic collapse, a leading Chinese newspaper warned on Monday.

The United States last week announced it would inject an extra $600 billion into its banking system in its latest effort to boost a fragile economic recovery, prompting criticism from a number of countries, notably China and Germany.

The overseas edition of Communist Party mouthpiece the People's Daily said in a front page commentary that this quantitative easing was bad for China and bad for the world.

"In essence this is an uncontrolled increase in money supply, equal to indirect exchange rate manipulation," Shi Jianxun of Shanghai's Tongji University wrote in the guest commentary.

The Federal Reserve's actions will "touch off a global competition to devalue currencies ... (leading to) a 'currency war' and trade protectionism, threatening the global economic recovery", Shi wrote.

"Exchange rate wars are in fact trade wars, and if they set off a trade war it won't only threaten the global economy, it will perhaps cause a collapse ... and everyone's interests will be harmed," the academic added.

The comments were the latest in a string of strongly worded criticisms of U.S. economic policies by Chinese economists and government officials ahead of the G20 summit in Seoul this week.

On Friday, Vice Foreign Minister Cui Tiankai suggested the move by the Federal Reserve would add to financial instability in China and other countries.

For his part, Federal Reserve Chairman Ben Bernanke in recent days has been defending the bond-buying, saying the measures to help restore a strong U.S. economy were critical for global financial stability.

"We are committed to our price stability objective," he said. "I have rejected any notion that we are going to raise inflation to a supra-normal level."

However, the People's Daily commentary asserted that the Fed's actions will increase inflationary pressure on China and other holders of foreign debt and cause "huge losses" for China's foreign exchange reserves, the world's largest at $2.65 trillion as of the end of September.

Cash will flood into financial institutions and go overseas, creating new asset bubbles and "lie in ambush" for future inflation, Shi added.

"Given the present international financial situation, countries should join together to restrain America's irresponsible behavior of issuing excessive amounts of money," Shi wrote.

"Emerging economies should cautiously raise interest rates ... to avoid large rises in the value of their currencies," he said, adding they would need to deal with trade disputes as well as managing inflation and hot money inflows.

The United States and China on Saturday appeared to take a step back from mounting criticism of each other's economic policies, but Beijing made clear it was still wary of Washington's latest move to print more money.

That temporary less-confrontational tone emerged after a two-day meeting of Asia Pacific finance ministers who gave their backing to last month's Group of 20 agreement to shun competitive currency devaluations and be vigilant against volatile exchange rate movements.

[Source: Reuters, Beijing, 07Nov10]

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