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How Will China React To Continued U.S. Monetary Recklessness?

November 21st, 2009

Among the many dangerous challenges facing U.S. economic policymakers is China’s growing unease with the profligate monetary looseness of the U.S. Federal Reserve. Witness the comment made by the Chairman of China’s Banking Regulatory Commission, Liu Mingkang, which coincided with President Barack Obama`s state visit to the People’s Republic of China. Here is what he had to say:

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation. U.S. monetary policy has seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy.”

Clearly, Chinese decision makers are increasingly viewing America’s monetary polices as utterly reckless. Given that China is now the largest holder of U.S. Treasuries, it would be unreasonably optimistic to expect Beijing to continue purchasing U.S. sovereign debt indefinitely, and at historically low rates of interest. What happens when the Chinese authorities begin moving away from the dollar? In my view, nothing good for the U.S. economy, especially as it sinks ever deeper into debilitating debt.

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