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The Firewall

I am presently attending the Beijing Forum at Peking University to present in a session on Global Imbalances and their Solutions. While the Great Firewall is preventing me from accessing youtube, facebook and the like, I have the privillege of getting a complementary copy of China Daily every morning in my hotel. Yesterday’s headline demanded that another firewall is created ( ‘Firewall needed’ to prevent cash surge), warning over capital influx as US starts “unbridled money printing” (=QE2):

China should “set up a firewall” as uncontrolled dollar printing in the United States will drive more liquidity into emerging markets, a central bank adviser said on Thursday.

“The most urgent need for the emerging market economies is to curb capital inflows,” Xia Bin, an academic member of the central bank’s monetary policy committee, told a financial forum in Beijing.

Xia’s comments came as the US Federal Reserve announced a new round of quantitative easing – pledging to buy $600 billion of government bonds – to prop up the ailing economy.

Claiming the US quantitative easing was “unbridled money printing”, Xia said China should push for plans to stabilize the world’s major currencies at the upcoming G20 summit.

In an essay published on Thursday elaborating his thoughts on reforming the international framework for prudent macroeconomic management, Xia warned that “another crisis would be inevitable” if the world failed to restrain the issuance of major reserve currencies, such as the US dollar.

Policymakers in emerging market economies criticized the Fed’s decision of pumping money into the economy, as they fear the flood of cash will intensify asset-bubble risks and push up their currencies. Analysts said such countries might roll out more measures to curb capital flows.

[…]

High real estate prices in China’s major cities and the country’s well-performing stock market, which has rebounded about 30 percent from the July low, could receive a boost from capital inflows, analysts said.

Xia said he is concerned about asset-bubble risk in China as a spillover from US policy.

Pressure for yuan appreciation could also increase, analysts said.

“The quantitative easing policy might not fulfill the target of revitalizing the US economy as the country’s financial system is still saddled by heavy debts, but the move will add pressure for yuan appreciation,” said Li Daokui, central bank adviser and professor at Tsinghua University.

The central bank set the reference rate of the yuan at 6.6708 against the greenback on Thursday while the dollar continued to weaken. But Li said there is no need to “overly panic”, and China’s exchange rate should move at its own pace.

Li said there will be a substantial amount of speculative capital flow into China, but given the country’s $5.5 trillion economy, the shockwave of “hot money” would be limited compared to its impact on Brazil and India.

“China is less sensitive or vulnerable to capital inflows given the comprehensive capital controls,” said Louis Kuijs, senior economist with the World Bank.

“The quantity of capital inflows (into China) is smaller than other countries in Asia, and the risks are still manageable,” Kuijs said.

Meanwhile, the FT, which is thankfully not blocked by the firewall, reports that “China tees up G20 showdown with US “:

Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”.

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