Fed’s actions rile allies

By Glenn Somerville and Zhou Xin

WASHINGTON/BEIJING (BestGrowthStock) – China on Friday rebuffed a U.S. plan to set limits for trade imbalances and Germany dubbed the Fed’s money-printing policy “clueless,” setting the stage for what could be a fractious G20 summit next week.

Washington believes an undervalued yuan is a major cause of economic imbalances and has pressed Beijing, largely in vain, to let the currency rise more swiftly to reflect the strength of what is now the world’s second-largest economy.

The waters of the debate have been muddied by the Federal Reserve’s decision to buy $600 billion in long-term bonds with new money in an effort to revive the flagging U.S. economy.

Resentment is rumbling worldwide that the initiative will generate even more instability by ramping up currencies against the dollar, inflating asset bubbles and increasing inflation.

“With all due respect, U.S. policy is clueless,” German Finance Minister Wolfgang Schaeuble told a conference.

“(The problem) is not a shortage of liquidity. It’s not that the Americans haven’t pumped enough liquidity into the market, and now to say let’s pump more into the market is not going to solve their problems.”

New U.S. unemployment figures on Friday, showing a surprisingly strong 151,000 jobs were created in October, caused some analysts to question whether the Federal Reserve’s pledge to buy up to $600 billion of Treasury securities was even necessary.

But with a jobless rate stuck at 9.6 percent, few doubted the Fed will proceed with buying.

“The Fed, like Main Street, watches the unemployment rate and they want to make sure there is a clear, discernible downward trend,” said Lindsey Piegza, an economist with FTN Financial in New York. “The Fed is certainly not going to be responsible for pulling the rug out from under this recovery.”

German Chancellor Angela Merkel will address U.S. policy in Group of 20 discussions on exchange rates, a government source said, adding that she shared Schaeuble’s criticism.

Policymakers from the world’s new economic powerhouses in Latin America and Asia have said they would consider fresh steps to curb capital inflows after the Fed’s move.

South African Finance Minister Pravin Gordhan said Fed policy “undermines the spirit of multilateral cooperation” that the G20 had sought to achieve. The money will find its way into financial markets of emerging nations with potentially devastating impact on their exports, he charged. {nLDE6A41IP)

Zhou Xiaochuan, China’s central bank governor, said while Beijing could understand that the Fed was implementing more monetary easing in order to stimulate U.S. recovery, it may not be a good policy for the global economy.

Before he left on an Asian trip that will take him to the G20 gathering next week, President Barack Obama said a dramatically realigned political landscape in the United States called for cooperation at home because U.S. global economic leadership was at stake.

“We can’t spend the next two years mired in gridlock,” Obama said in a reference to the outcome of mid-term elections that put Republicans in control of the U.S. House of representatives. “Other countries, like China, aren’t standing still. So we can’t stand still either.”

NO BALANCE

Efforts to reduce imbalances that are destabilizing the global economy will top the agenda of the November 11-12 summit of the Group of 20 forum of leading economies in Seoul.

China and Germany have now both opposed a plan floated by U.S. Treasury Secretary Timothy Geithner last month to cap current account surpluses and deficits at 4 percent of gross domestic product.

“Of course, we hope to see more balanced current accounts,” Chinese Vice-Foreign Minister Cui Tiankai told a news briefing. “But we believe it would not be a good approach to single out this issue and focus all attention on it. The artificial setting of a numerical target cannot but remind us of the days of planned economies.”

Cui, China’s chief G20 negotiator, also rejected any attempt to set target ranges for the yuan to appreciate.

“That would indeed be asking us to manipulate the … exchange rate, and it is something that we will of course not do,” Cui said.

ASEAN, the 10-nation group of southeast Asian countries, will also raise concerns at the G20 over the U.S. proposals.

“We would like to work with G20 to correct imbalances,” Thai Finance Minister Korn Chatikavanij said in the Japanese city of Kyoto, where Asia-Pacific finance ministers are meeting.

“But we are concerned that the U.S. plan about current account balances might lead to trade protectionism.”

The Asia-Pacific Economic Cooperation (APEC) forum in Kyoto, which Geithner will attend, will also provide an opportunity for emerging economies to voice their views of the Fed’s action.

INTEREST RATES

The Bank of Japan gave details of its own asset-buying program announced last month. Worth 5 trillion yen ($62 billion), it is just a tenth the size of the Fed’s scheme.

By pointing out the difference in scale, Economics Minister Banri Kaieda suggested the BoJ might face calls in the future for an expanded scheme.

But Cui said he was worried at the prospect of a flood of money pouring into global markets in search of higher yields.

“They owe us some explanation,” he said. “I’ve seen much concern about the impact of this policy on financial stability in other countries.”

An official newspaper said China needed to respond by raising interest rates again following a surprise increase on October 19. Inflationary pressures prompted both India and Australia to raise interest rates this week.

Thailand’s Korn accepted the country’s currency, the baht, would appreciate due to strong economic fundamentals, but said he could implement further capital controls, either alone or in cooperation with other countries.

Thailand has imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai government bonds. Brazil has also taxed foreign buyers of its bonds.

(Additional reporting by Annika Breidthardt in Berlin; Writing by Glenn Somerville, Alan Wheatley and Mike Peacock; Editing by Andrew Hay)

Fed’s actions rile allies