A Chinese bank worker counts 100-yuan notes and U.S. dollar billsSTR/AFP / Getty Images
Facing a speculative wave of foreign investment, China and other emerging market economies are clamping down on the so-called hot money rippling through their economies in the wake of the United States' latest move to stimulate growth and employment.
The U.S. Federal Reserve's decision to print dollars to buy U.S. Treasuries - a measure that is designed to lower longer-term interest rates, but that might also weaken its currency - has heightened tension between leaders of the G20 countries as they prepare to begin their summit in Seoul on Thursday. Senior officials from Germany, Brazil and elsewhere have been critical of the Fed decision; some countries, fearing the new money will flood into their countries in search of higher returns, are actively trying to keep some of it out, to take the pressure off their currencies.
On Tuesday, China became the latest to act. The world's second-largest economy moved to curb speculative inflows of money with a series of measures that included tightening banks' foreign debt quotas and placing new controls on equity investments by foreign companies in China.
The new measures, in conjunction with a surprise interest rate hike last month and other tightening initiatives, are aimed at preventing inflation and speculative bubbles in Chinese property and stock markets. Chinese government officials contend that the U.S. policy of quantitative easing and the excess capital it creates will exacerbate the problem of too much money flowing into fast-growing markets such as China, Brazil, South Korea and Taiwan.
The attempts to stem hot money come amid a growing chorus of criticism of U.S. economic policy by Chinese and other emerging-market government officials leading up to the G20. The meeting is shaping up to be a global pile-on against the U.S. and the $600-billion (U.S.) stimulus measure which could prompt other countries to devalue their currencies to keep their exports competitive.
The United States and many Western countries have called on China to allow its undervalued currency, the yuan, to appreciate to help rebalance global trade. But China and other exporting countries are now criticizing the United States for its decision to implement another round of quantitative easing designed to lower long-term interest rates and boost domestic spending but that is also expected to reduce the value of the U.S. dollar.
U.S. President Barack Obama has said the Fed's move is "good for the world as a whole," but in an apparent reference to the United States, China's Finance Minister Xie Xuren said Tuesday that some issuers of major currencies have had "excessively loose" monetary policies.
Chinese Vice-Premier Wang Qishan said developing countries are now facing large inflows of capital and increasing inflationary risks.
"The global economy is gradually recovering but there are still many uncertainties," Mr. Wang said in a meeting with his British counterpart, George Osborne.
"Emerging economies are seeing large capital inflows and face mounting inflationary risks. There is excessive liquidity in the world and fluctuations in international financial markets. All these are dampening market confidence."
The Shanghai stock market index has gained about 18 per cent since the start of September and on Tuesday the Chinese yuan gained 0.51 per cent against the U.S. dollar. Under pressure to help rebalance global trade, China vowed to allow more "flexibility" for its currency ahead of the last G20 leaders summit in Toronto in June. But the yuan has only risen 2.7 per cent against the greenback so far this year.
Rising prices for food and foreign commodities are expected to push China's annualized inflation rate to 4 per cent or higher in October, well above the government's annual target of 3 per cent for 2010.
"We remain skeptical that policy makers have done enough to keep price pressures at bay and expect that any easing in consumer price index inflation may prove short-lived without further action," said Brian Jackson, emerging market strategist with RBC Dominion Securities, in a report to clients that predicted China will raise interest rates by another 50 basis points in 2011 to allow for further appreciation of the yuan against the U.S. dollar.
China's move to halt hot money inflows was mirrored by Taiwan's Financial Supervisory Commission, which restored curbs on foreign investments in government bonds. On Monday, foreign capital inflows pushed the Taiwan dollar to its largest one-day gain in more than a decade.
Other countries, including Japan, Colombia and Brazil, have also implemented measures to reduce foreign capital inflows and keep their currencies from appreciating.
Brazil's Foreign Trade Secretary Welber Barral warned Tuesday that a failure of the G20 leaders to resolve the issue of currency imbalances could spark a global trade or currency war.
"If [a deal]is not reached there is a risk that every country seeks individual solutions which can be costly for everyone," Mr. Barral told Reuters.