BEIJING (MNI) – There was little official Chinese comment Thursday
on the Federal Reserve’s latest decision on quantitative easing, but
there was no shortage of criticism here of a program that government
economists and ex-officials said could drive the dollar lower, stoke
inflation and threaten global economic stability.

Domestic share prices were stronger, as was the yuan fixing against
the dollar, a response to the overnight selling of the greenback that
followed the Federal Reserve announcement.

But there was little official criticism of the long-expected
announcement, with only low-level government economists and ex-officials
warning of the likely destabilizing, inflationary impact of the $600
billion Treasury purchase program.

Credit Suisse economist Dong Tao said that the government may have
been loathe to make any official comment because of the benefits it may
receive from the Fed’s efforts to reflate the U.S. economy, but also
because it shares some of its sins.

“The Fed is guilty of using monetary policy to influence the
exchange rate — China is guilty of that too,” he said.

But that isn’t to mean that there was no criticism. The morning
newspapers contained opinion pages outlining the dangers of Fed policy
while the government statistics agency chose today to publish a critical
recent speech from one of its former directors.

China Central Television — the government broadcaster whose reach
covers over 360 million households — devoted part of its lunchtime news
broadcast to lashing out at the policies agreed by the Federal Open
Market Committee.

“The U.S. government is now creating bubbles. The new round of the
world financial crisis, characterized by U.S. government
bubble-creation, may start today,” Yang Yu, a CCTV commentator, told his
viewers.

“The U.S. is taking a road of no return.”

The National Bureau of Statistics chose today to publish a recent
speech by ex-director Li Deshui which accused of the U.S. of imperiling
global economic stability through its monetary policies.

The Fed announcement comes amid renewed concerns about inflation in
China, though meat prices — and not Ben Bernanke — are seen as the
main culprit for the upsurge in the consumer price index.

The market is currently speculating that Chinese consumer price
inflation hit 4% last month, which would mark the highest level since
October 2008 (October inflation data is scheduled for release on
November 11).

Beijing is also attempting to clamp down on speculation in the
property market, with a fresh round of tightening measures introduced in
September after an initial round in April.

Government officials are concerned that a fresh flow of liquidity
onto world markets could only add to domestic inflationary pressure.
This comes just as the direction of policy appears to be shifting away
from a pro-growth stance in favor of managing price pressures.

Mei Xinyu, a researcher with Ministry of Commerce, said that
quantitative easing could give Chinese exports a boost in the
short-term, but warned that the longer-term impact will be less
beneficial.

“The implications of quantitative easing will be the inflation of
asset bubbles in other countries, leading to the severe risk of bubbles
bursting,” he said, speaking prior to the Fed announcement. “Most (of
the U.S.’) trading partners will be in trouble.”

The World Bank on Wednesday issued its now-standard call for China
to boost exchange rate flexibility, but this time cautioned that it may
not be enough to hold off the flood of liquidity from the advanced
economies.

That was a theme taken up by People’s Bank of China advisor Xia
Bin, who said in a Thursday opinion piece (which he then repeated at a
conference later) that countries such as Brazil and Thailand should ramp
up taxes on capital flows to defend their economies.

“For China, we need to use exchange rate and capital control
measures to build a firewall against the external impact,” he said.

Li Daokui, who is a colleague of Xia’s on the PBOC Monetary Policy
Committee, said at a conference here that Japan’s experience shows extra
liquidity won’t lead to financial institutions lending more.

Both Li and Xia called Thursday for the government to shift its
monetary policy stance away from the “appropriately loose” bias adopted
in early November 2008.

For all the bricks thrown at the Fed in China today, the question
about the real impact of its policies on the domestic economy remains
open to question.

Government officials insist that they are concerned about the
direction of U.S. monetary policy, but the fact that an eye-popping
CNY9.6 trillion in new loans were extended by China’s banks last year
isn’t the FOMC’s fault.

Similarly, it’s the Chinese central bank that is charged with
managing domestic liquidity levels via its management of the interbank
market and open market operations.

But that doesn’t let Washington completely off the hook, argued
Credit Suisse’s Tao.

“The biggest reason that Chinese inflation is going higher is
domestic liquidity is running out of control but the global monetary
environment is playing a role — commodities prices wouldn’t be flying
like this without the Fed,” he said.

beijing@marketnews.com
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