Chinese Criticize US Market Bailout Policies, Debate a Dollar Depreciation “Conspiracy”April 14,2008

Chinese Criticize US Market Bailout Policies, Debate a Dollar Depreciation “Conspiracy”

April 14,2008

Why doesn’t China’s government, under strong pressure from individual and institutional investors as well as its own officials, bailout its own stock market? The answer may partly lie in the criticism it is leveling at the US government for what it sees as its “irresponsible” policies.
Chinese Vice-Minster of Finance Li Yong told the IMF and the World Bank last weekend in Washington while attending the spring meetings of those organizations that they should urge developed countries to implement responsible monetary and exchange rate policies and carry out more effective measures to eliminate financial crises. Li also warned that from a mid- and long-term perspective, the interest cuts by the US and some other economies aiming to curb the credit crisis may be leading to a global liquidity glut.

The US has taken a variety of measures, e.g. interest rate cuts and capital injections, to relieve its credit crisis, none of which has done a thing to ease USD depreciation. Analysts say the dollar’s downward spiral will be a Chinese focus during the next Sino-US Strategic Economic Dialogue (SED) to be held in June.
Developed countries should act responsibly

People’s Bank of China Governor Zhou Xiaochuan said that developed countries must be mainly responsible for the stability of the globalized financial market, and should adjust their macro policies at a proper time to avoid or eliminate crises as soon as possible.

Li Yong stated that since the outbreak of the US subprime mess the USD had continued to depreciate, global markets were fluctuating, and global economic growth had apparently slowed down, as major economies were facing risks of both economic downturn and accelerating inflation, rising commodity prices, and worsening fluctuation in international capital markets, with trade protectionism again becoming a popular subject of conversation.

Dollar depreciation is costing China, and not just in money lost, though that is bad enough. Wang Yuanlong, a researcher at the Bank of China, estimates the loss for foreign exchange reserve alone could be in the tens of billions of dollars. But USD depreciation has also intensified domestic inflation pressures by lifting commodity prices, and its rapid depreciation against other international currencies will slow down the RMB appreciation against those currencies and thus bring yet more pressure for RMB appreciation.

Whispers of “conspiracy” have inevitably arisen inside China. Wang Yuanlong said that he would not entirely rule out the possibility that the US had purposely promoted USD depreciation, as this was much the same as repudiating debts. “Developing countries earn dollars by exporting precious resources, while the US only needs to keep the printing presses rolling. The US dollar owned by foreigners is actually a kind of debt,” he said.

“Malignant” or even “malicious” depreciation of the USD has been widely debated among Chinese scholars. Analysts say this time China’s urging of the IMF to pressure developed countries is merely a gentle measure. It is expected that during the upcoming SED, China will raise the depreciation issue and push the US to take serious measures.

Wang Yuanlong thinks China has reason to ask developed countries, the US in particular, to implement more responsible monetary policies. The current global economic slow down and financial market fluctuation are closely related to policies within the US. And since the USD is the global exchange currency, if the US allows USD depreciation, say, as a method of debt alleviation, then other countries will be seriously harmed.

As for whether the US government should bailout its markets, Morgan Stanley's Asia Chairman Stephen Roach declared that fund injections and interest rate cuts would only produce new asset bubbles and further reduce people’s willingness to deposit money in US banks, resulting only in a longer economic recession