Xi Jinping attended the “2022 World Economic Forum” video conference in Beijing on January 17. At the meeting, President Xi pointed out that the warning of the United States’ monetary tightening policy is worth noting.
President Xi said that if the monetary policies of major economies slammed into the brakes or made a sharp turn, there would be serious negative spillover effects and challenges to world economic and financial stability, and developing countries would bear the brunt. He called on major economies to coordinate their fiscal and monetary policies to prevent the world economy from bottoming out again. Major developed countries should adopt responsible economic policies, control policy spillover effects, and avoid serious impacts on developing countries. What President Xi is referring to is that the U.S. may tighten monetary policy rapidly this year.
Since the beginning of the epidemic in 2020, the monetary policy of the United States has been extremely loose in the past two years. The Federal Reserve cut interest rates to zero, and printed $120 billion a month to buy bonds and other bonds, releasing a large amount of water into the market to resist the impact of the new crown epidemic on the U.S. economy. The side effect of the United States’ vigorous release of water is to significantly push up the stock market and other asset markets. The surging dollar also spilled over to other economies, causing global investment markets to rise. However, more than a year after the United States vigorously printed money, the negative effects have gradually emerged. The more prominent one is the global inflation, and the inflation in the United States is also quite violent. In December, U.S. inflation surged to 7 percent year-on-year, the largest increase in 40 years. In the same period, China’s inflation rate was only 1.5%, much lower than that of the United States.
The U.S. economy is already relatively strong, and it is experiencing high inflation. The minutes of the Fed’s recent meeting show that the U.S. not only wants to stop printing money, but also plans to sell the bonds it bought before, in a disguised way. On the other hand, the market also expects that the US will raise interest rates 3 times this year, each by 0.25%, for a total of 0.75%, and some people estimate that it will raise interest rates 4 times.
If the U.S. really cuts water and raises interest rates so quickly, this will be what President Xi calls “sudden braking.” The effect will be a rapid rise in the exchange rate of the U.S. dollar and aggravate the return of capital to the U.S. This will have a big impact on the economies of emerging markets, especially those emerging markets that borrow a lot of foreign debt in US dollars. Because the exchange rate of the US dollar rises, the local currencies of those countries will depreciate, and if they have to pay back more money. In the past, the financial turmoil that broke out in many emerging countries was related to the appreciation of the US dollar. In the 1990s, the Clinton administration took the stage and adopted a “balanced budget” policy to reduce deficits, which caused the US dollar to appreciate all the way, and eventually triggered the Asian financial crisis.
In fact, the U.S. monetary policy has not yet made a “sharp turn” last year. Emerging markets already have a strong sense of “slight”. The main reason is that the U.S. has printed a lot of money to fight the epidemic, and the supply chain has been broken. The sharp rise has pushed up inflation in many emerging countries. The sharp rise in inflation caused the local currency to fall, further exacerbating imported inflation. In order to fight inflation, they have to raise interest rates.
Last year, the US dollar appreciated by 6.7% against the six major currencies in the world. Brazil’s central bank raised interest rates by 0.575% throughout the year, while the Brazilian real still fell by more than 8% against the US dollar. Turkey, on the other hand, not only did not raise interest rates, but also cut interest rates in a high inflation environment, hoping that interest rate cuts would stimulate the economy, causing the Turkish lira to plunge more than 20% against the US dollar last year.
The U.S. has not yet officially collected water, and the economies of emerging countries have been in a hurry last year. The United States began to collect water this year, and I am afraid the crisis will be even greater. The IMF last week warned of tough times as emerging economies brace for shocks as the Federal Reserve prepares to raise interest rates and a variant of the Omicron virus slows world growth.
“Reuters” described one of the most classic and oldest problems, which is repeating itself. When these emerging economies need additional support, they will have to tighten monetary policy to fight inflation, but higher interest rates will further slow the economy.
President Xi called on the United States to adopt a responsible economic policy, control the spillover effects of tight monetary policy, and avoid impacting developing countries. But in the way the United States acts, these appeals for public welfare may be ignored. Therefore, the whole world should fasten their seat belts and prepare for the impact.
China’s situation is relatively good. First, the inflation rate is low. The inflation rate is only 1.5%. There is no strong demand for inflation control. Second, the exchange rate of the RMB against the US dollar has been rising repeatedly in recent years. The low level of the RMB in recent years was in May 2020. The yuan, currently 6.34 yuan, has risen by 11% cumulatively, and by 2.5% last year alone.
Therefore, in the face of the impact of the US water withdrawal, China still has some room to carry out loose monetary policy to support the economy, and other emerging markets are a little bit at risk.
Lu Yongxiong
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