Xi Jinping urges West not to ‘slam the brakes’ by hiking interest rates too quickly

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Hong Kong (CNN Business)

China is urging central banks in the West not to hike interest rates too fast to fight inflation as it goes in the other direction to battle a sharp economic slowdown.

Chinese President Xi Jinping on Monday called on major world economies to spur growth by coordinating their policies as the world continues to pull itself out of the turmoil caused by the coronavirus pandemic.
“The global industrial chains and supply chains have been disrupted. Commodity prices continue to rise. Energy supply remains tight. These risks compound one another and heighten the uncertainty about economic recovery,” Xi told attendees of the 2022 World Economic Forum during a speech delivered online.
He warned against the effects of raising interest rates too much too quickly, saying that such measures could threaten global financial stability.
“If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers,” Xi said. “They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it.”
Many global policymakers are grappling with rising inflationary pressure, and starting to end their pandemic-era stimulus plans.
The Federal Reserve signaled last month it could raise interest rates three times in 2022, while the European Central Bank announced it would end its crisis-era bond-buying program in March. The Bank of England increased interest rates last month, becoming the first major bank to do so since the pandemic began. Central banks in Eastern Europe and Latin America have also raised interest rates aggressively to cool inflation.
But China — the only major economy to grow in 2020 — is taking a different tack as its economy slows and it grapples with the challenges of maintaining momentum while holding firm to its zero-Covid strategy, a strict policy of locking down areas to prevent outbreaks that has isolated the country from much of the world.
The People’s Bank of China has been loosening its purse strings to keep things running smoothly.
On Monday, the central bank cut a key interest rate for the first time since April 2020. Last month, it slashed both the reserve requirement ratio — which determines how much cash banks must hold in reserve — and the loan prime rate, a rate at which commercial banks lend to their best customers, and which serves as the benchmark rate for other loans.
Beijing’s latest measures came as the country reported that its economy expanded 8.1% in 2021. While that number outstripped the government’s own targets, growth slowed to half that pace in the final quarter of the year and is expected to struggle even more because of Covid and a deepening real estate crisis.
Government economists in China have been warning of a spillover effect caused by the Fed’s interest rate hikes.
Zhu Baoliang, chief economist at China’s State Information Center — a government policy think tank — told the central bank-backed Financial News that the country needs to monitor and potentially prevent any financial crisis caused by the Fed’s interest rate hikes.
“Historically, the Fed’s rate hikes have triggered financial and economic crises in other countries for many times,” Zhu told the newspaper, adding that an imbalance could cause foreign capital to flee China.
Global investments have poured into the Chinese bonds in the past year, as investors chase comparatively juicy returns in the country’s markets. The strong influx of capital has contributed to an exceptional performance of the yuan, which was one of the best performing currencies in 2021.
Zhu also called attention to the dollar-denominated bond market for Chinese companies, which he pointed out has expanded rapidly. Many firms within China’s struggling real estate industry hold dollar-denominated bonds; if they become even more expensive to pay back, that could cause more headaches.
And Yang Shuiqing — a researcher from the Chinese Academy of Social Sciences, a top government think tank — also wrote in an article on state-run news portal China.com that the Fed’s rate hikes could also slow demand in the United States, thus affecting exports from China, America’s largest trading partner.
The International Monetary Fund, meanwhile, has warned that abruptly tightening monetary policy in the United States or Europe could cause economic turbulence in developing economies.
“Emerging economies should prepare for potential bouts of economic turbulence” due to faster policy tightening by the Fed, the IMF wrote in a blog last week.
The sentiment about economic growth and inflation has shifted in the United States, the IMF wrote, as prices rise at the fastest pace in almost four decades.
The economic recovery in emerging countries, meanwhile, hasn’t been as robust, it said, adding that those places are confronting “substantially higher public debt.”
“Faster Fed rate increases in response [to inflation] could rattle financial markets and tighten financial conditions globally,” the IMF said, also warning of slowing demand and trade from the United States and its effect on developing economies, which rely on exports to American consumers.
Economists from the Fed wrote last June that risk of spillover to emerging markets depends on a few factors, including conditions within those regions and how vulnerable and sensitive they are to higher US rates.


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