An excessive amount of stimulus within the U.S. could convey ‘imported inflation’ to China, economists warn

BEIJING – As the US pumps trillions of dollars into its economy following the coronavirus pandemic, economists are concerned about spillover effects in China, including the risk of “imported inflation”.

Worries about high inflation or rapidly rising prices hit US markets last week. The U.S. Congress is currently reviewing a $ 1.9 trillion stimulus plan, which critics say could spike inflation and add to debt, which came after last year’s historic $ 2 trillion stimulus package has risen.

In China, economists are concerned about growth risks as the country seeks to fully recover from the shock of the pandemic.

“The large-scale issuance of US Treasuries and the rapid expansion of the Federal Reserve (balance sheet) have increased the spillover effect of US macro-policies,” former Treasury Secretary Lou Jiwei said in an article published in the latest Treasury Department government magazine “Public Finance Research” was published. That comes from a CNBC translation of the Chinese text.

Lou said the impact of big countries’ policies would hit emerging economies economically and financially. “We are facing major changes that have not been seen in a century,” he said.

Lou is also the chairman of the Foreign Affairs Committee of the Chinese People’s Political Consultative Conference – the meeting of the political advisory body during the annual “Two Sessions” parliamentary assembly that began this week.

China’s monetary policy

During the parliamentary session on Friday, Prime Minister Li Keqiang announced a growth target of over 6% for 2021 and said the government would keep monetary policy “at a reasonable and appropriate level”.

Analysts are watching the week-long meeting for details on how leaders of China may change monetary policy amid the general economic recovery from the shock of Covid-19.

Covid-19 first appeared in the Chinese city of Wuhan at the end of 2019. Tight lockdowns in China allowed the country to control the outbreak domestically within months, but not before the pandemic spread around the world.

The coronavirus has hit the US hardest with more than 28.8 million cases and 520,000 deaths, according to Johns Hopkins University.

The US and Europe have had exceptional monetary policies over the past two years, said Zhang Cheng, director of credit at Bluestone Asset Management, citing historically low interest rates and other measures to support economic growth. This has led to a rise in commodity prices and pressure from “imported inflation” in China, he said, according to a CNBC translation of his Mandarin-language statements.

Zhang added that China should protect itself from risk by avoiding US dollar-denominated assets.

The country is the second largest holder of US Treasuries in the world and has foreign exchange reserves of $ 3.2 trillion, mostly denominated in US dollars.

In tightening policy, Chinese monetary policy must take into account external risks such as the potential for “imported inflation” and the long-term depreciation of the US dollar as a result of US stimulus, JD Digits economists Shen Jianguang and Zhang Mingming wrote in last week a comment from a state news agency.

Such a decline in the greenback would compromise the security of China’s foreign exchange reserves and make efforts to increase international use of the yuan more important, the authors said.

On short-term inflation concerns, analysts are watching the price rise for many commodities, of which China is the world’s largest consumer. Last month, copper prices rose to their highest level since 2011. These price increases would increase production costs in China.

However, analysts like Ma Yan, who covers foreign exchange at Hangzhou-based broker Nanhua Futures, expect the impact of such imported inflation will not ultimately be as big.

Instead, Ma is more concerned about how China can control its real estate bubble and oversees real estate companies’ credit and liquidity risk.

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