China says Fed bond move may hurt other countries

[November 05, 2010]  BEIJING (AP) -- China's central bank chief said Friday that the Federal Reserve's move to inject money into the U.S. economy is understandable because of its slow recovery but still might hurt the rest of the world.

Speaking at a business conference, Zhou Xiaochuan said he would not comment on arguments for or against the Fed's plan to buy Treasury bonds, known as quantitative easing. But he said the debate highlighted the need for reforming the international financial system.

The Fed announced this week that it would sink $600 billion into government bonds over the next eight months to lower long-term interest rates in an effort to revive economic growth.

Some governments have expressed concern that lower U.S. interest rates will result in more money flooding into their markets seeking higher returns, pushing up exchange rates and hurting exports by making their goods more expensive.

"If the domestic policy is optimal policy for the United States alone, but at the same time it is not an optimal policy for he world, it may bring a lot of negative impact to the world. There is a spill over," Zhou said.

"We have to solve this problem by reforming the international currency system," he said, while not giving details on policy reforms.

Zhou said he understood that the Fed's mission was to target the health of the U.S. economy, helping to create employment and keeping inflation low.

"We have a slower recovery of the economy, high unemployment and low inflation. Under these circumstances, from that perspective, when we have a policy for a very low rate that is very close to zero, and for quantitative easing, it is reasonable. We can understand ... under current circumstances, of course," said Zhou, speaking at a conference organized by Caixin, a leading Chinese business magazine.

He said Chinese central bank officials met regularly with their Fed counterparts, including Chairman Ben Bernanke, and the Americans gave detailed explanations for the monetary changes.

Strains over Fed strategy might hamper efforts to agree on measures to fix strains in the global economy at next week's Group of 20 leaders summit in Seoul.

Leaders from the United States, Japan, Germany, China and other governments that account for 85 percent of global output hope to make progress on reducing trade gaps and current account surpluses.

A Chinese diplomat quoted Friday by the official Xinhua News Agency said Washington should act responsibly and give other governments a thorough explanation.

"The international community has every reason to feel worried, so the U.S. side owes it a proper explanation for the move," Vice Foreign Minister Cui Tiankai was quoted as saying.

On Thursday, the Philippine central bank said it would "remain vigilant" about the possible impact of the Fed's action. A bank deputy governor warned the money flows from the Fed's move might add to instability in emerging markets.

Brazil's finance minister, Guido Mantega, also criticized the Fed's move, saying it would devalue the dollar and hurt Brazil and other export-dependent economies.

Zhou said Beijing's controls on capital flows should shield China from a possible surge in speculative "hot money" triggered by the Fed's move.

Beijing keeps its financial markets isolated from global capital and tightly controls the exchange rate of its yuan, which has risen more slowly against the U.S. dollar than some Asian currencies such as the Thai baht.

Zhou defended Beijing's decision to move gradually in easing currency controls despite U.S. and other foreign pressure to let the yuan rise faster.

Beijing promised a more flexible exchange rate in June and has allowed the yuan to rise by 2.5 percent since then -- far less than critics want. They say Beijing's controls keep the yuan undervalued and give China's exporters an unfair price advantage, swelling its trade surplus and costing jobs abroad.

Comparing policy changes to the multiple ingredients used to make traditional Chinese medications, Zhou said currency changes were part of a package of reforms including encouraging domestic consumer spending that would boost imports and narrow China's trade gap.

"We do not want to emphasize that one ingredient will deliver a cure," he said.

[Associated Press; By JOE McDONALD]

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