China warns of worldwide devaluations and inflation


By Sandy Hendry
Bloomberg News
Wednesday, May 6, 2009

HONG KONG --Global central banks risk inflation, currency devaluation, and a "big consolidation' in bond markets by pumping cash into their economies, the People's Bank of China said in its quarterly monetary policy report.

The Federal Reserve and the Bank of England this year started quantitative easing, or printing money to buy government bonds, a policy that the Bank of Japan pioneered to revive its economy at the start of the decade. The European Central Bank's 22-member board, which meets tomorrow, is split on whether it should buy financial assets to tackle its recession.

"A policy mistake made by some major central bank may bring inflation risks to the whole world," China's central bank said in the report today. "As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies' devaluation risks may rise."

Chinese Premier Wen Jiabao expressed concern in March that the dollar will weaken, eroding the value of China's holdings of Treasuries, as the U.S. borrows unprecedented amounts to spend its way out of recession. China’s Treasury holdings climbed 52 percent in 2008 and stood at about $744 billion as of the end of February, according to U.S. government data.

"In the medium and long term, as the financial markets stabilize and economies gradually recover, increasing inflation expectations, rising interest rates and central bank's liquidity-absorbing operations may cause a 'big' consolidation in bond prices," the central bank's statement said.

Federal Reserve Chairman Ben S. Bernanke told the congressional Joint Economic Committee yesterday that inflation will "remain low" even as a recovery gets under way because businesses will be slow to build back production and payrolls.

ECB council member Athanasios Orphanides yesterday said the financial crisis needs "drastic" measures. Orphanides and fellow member George Provopoulos from Greece have indicated they may support cutting the target rate to less than 1 percent and buying debt to pump money into the economy.

ECB Executive Board member Lorenzo Bini Smaghi said on April 28 that policy makers should be "wary of the possible side-effects" of unconventional measures.

The euro may rise against the dollar because ECB policy makers will probably decide against introducing so-called quantitative easing when they meet May 7, Bank of Tokyo-Mitsubishi UFJ Ltd. said.

"The failure to move to quantitative easing in the near term should help support the euro, especially against the dollar, given the Federal Reserve's contrasting aggressive monetary easing approach," Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo, wrote in a note yesterday.

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