US rates a global risk: China

Fairfax Media

RISKY: Ultra-low interest rates in the United States are fuelling speculation in overseas asset markets and threatening the global economic recovery, a senior Chinese official said.

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Ultra-low interest rates in the United States are fuelling speculation in overseas asset markets and threatening the global economic recovery, a senior Chinese official said.

In unusually blunt criticism of U.S. monetary policy on the day that President Barack Obama arrives in China for a visit, Chinese banking regulator Liu Mingkang said the Federal Reserve's pledge to hold down borrowing costs and the weak dollar had emerged as a "new systemic risk."

"This situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices," he said in a speech at a financial forum in Beijing.

"It is boosting speculative investment in stock and property markets and will pose new, insurmountable risks to the global recovery and, particularly, to the recovery in emerging markets," Liu, chairman of the China Banking Regulatory Commission, said.

Earlier this month the Fed restated its commitment to keep borrowing costs near zero for "an extended period." With rates so low and funds readily available, "carry trade" investors have borrowed huge sums of money in dollars to buy higher-yielding assets overseas.

Liu made no specific mention of Chinese markets in his address, but Beijing has its own additional reasons to be worried about low U.S. rates.

The yuan is heavily anchored to the dollar, making it very difficult for China to raise interest rates before the United States without attracting more speculative cash than is already streaming toward its stock and property markets.

And a slumping dollar weighs on the value of China's $2.27 trillion of foreign exchange reserves, of which about two-thirds are estimated to be invested in dollar-denominated assets.

Liu also said the global economic recovery gave little grounds for optimism, as it was driven largely by governments' stimulus spending rather than real corporate activity.