China’s Xi Jinping urges West not to ‘tighten the brakes’ by raising interest rates too quickly

Chinese President Xi Jinping on Monday called on the world’s major economies to boost growth by coordinating policies as the world continues to emerge from the turmoil caused by the coronavirus pandemic.

“Industrial chains and global supply chains have been disrupted. Commodity prices continue to rise. Energy supplies remain tight. These risks are escalating and increasing uncertainty about economic recovery,” he said. Xi told attendees of the 2022 World Economic Forum during a keynote address. in line.

He warned of the effects of raising interest rates too quickly, saying such moves could threaten global financial stability.

“If major economies slow down or reverse course in their monetary policies, there would be serious negative fallout,” Xi said. “They would present challenges to global economic and financial stability, and developing countries would bear the brunt of them.”

Many global policymakers are grappling with mounting inflationary pressure and are beginning to wind down their pandemic-era stimulus packages.

The Federal Reserve signaled last month that it could raise interest rates three times in 2022, while the European Central Bank said it would end its crisis bond-buying program in March. The Bank of England raised interest rates last month, becoming the first major bank to do so since the start of the pandemic. Central banks in Eastern Europe and Latin America also raised interest rates aggressively to curb inflation.

But China – the only major economy to grow in 2020 – is taking a different approach as its economy slows and grapples with the challenges of maintaining momentum while firmly sticking to its zero-Covid strategy, a tough policy lockdown of areas to prevent epidemics that has isolated the country from much of the world.

The People’s Bank of China has has loosened his purse strings so that everything goes well.

On Monday, the central bank lowered a key interest rate for the first time since April 2020. Last month, it cut both the reserve requirement ratio – which determines how much cash banks must hold in reserve – and the prime loan rate, a rate at which commercial banks lend to their best customers and which serves as a reference rate for other loans.

Beijing’s latest moves came as the country announced its economy grew by 8.1% in 2021. While that number exceeded the government’s own targets, growth has slowed to half that pace. in the last quarter of the year and is expected to struggle even more due to Covid and a worsening real estate crisis.

Chinese government economists have warned of a ripple effect from Fed interest rate hikes.

Zhu Baoliang, chief economist at China’s State Information Center – a government policy think tank – told the central bank-backed Financial News that the country needs to monitor and potentially prevent any financial crisis caused by Fed interest rate hikes.

“Historically, Fed rate hikes have repeatedly triggered financial and economic crises in other countries,” Zhu told the paper, adding that an imbalance could prompt foreign capital to flee China.

Global investments have flocked to Chinese bonds over the past year as investors seek relatively juicy returns in the country’s markets. The strong capital inflow contributed to an outstanding performance of the yuan, which was one of the best performing currencies in 2021.

Zhu also drew attention to the dollar-denominated bond market for Chinese companies, which he said has been growing rapidly. Many companies in China’s troubled real estate sector hold dollar-denominated bonds; if they become even more expensive to repay, it could cause more headaches.

And Yang Shuiqing – a researcher at the Chinese Academy of Social Sciences, a leading government think tank – also wrote in a post on the state-run news portal that the rate hikes the Fed could also slowing demand in the United States, thus affecting exports from China, the largest trading partner of the United States.
World experts are very worried about the future, according to a Davos survey

The International Monetary Fund, meanwhile, has warned that a sharp tightening of monetary policy in the United States or Europe could cause economic turbulence in developing economies.

“Emerging economies should prepare for possible episodes of economic turbulence” due to more rapid Fed policy tightening, the IMF wrote in a blog post last week.

Sentiment on economic growth and inflation has changed in the United States, the IMF wrote, as prices rise at the fastest pace in nearly four decades.

Economic recovery in emerging countries, meanwhile, has not been as robust, he said, adding that those places face “significantly higher public debt”.

“The Fed rate is rising faster in response [to inflation] could rattle financial markets and tighten financial conditions globally,” the IMF said, also warning of slowing demand and trade from the United States and its effects on developing economies, which depend on exports to US consumers.

Fed economists wrote last June that the risk of contagion to emerging markets depends on a few factors, including conditions in those regions and their vulnerability and sensitivity to rising U.S. rates.

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