China Says Fed Easing May Flood World Economy With ‘Hot Money’

November 08, 2010, 5:38 AM EST

Nov. 8 (Bloomberg) — Chinese Vice Finance Minister Zhu Guangyao said the U.S. Federal Reserve’s decision to pump $600 billion into the economy might “shock” emerging markets by flooding them with capital.

The first round of quantitative easing, as the Fed policy is termed, in 2009 was justified because the global economy lacked liquidity, Zhu told reporters in Beijing today. With a recovery now under way, new purchases of Treasuries to inject funds into the financial system may be destabilizing, he said.

“Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,” Zhu said. The U.S. “has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.”

Zhu’s comments underscore concern around the world that the Fed’s decision will benefit the U.S. at the cost of stability and growth elsewhere. Chinese and European leaders have said they plan to discuss the impact of quantitative easing at the Group of 20 summit this week in Seoul as well as the dangers of competitive currency devaluations.

German Finance Minister Wolfgang Schaeuble compared the Fed move to China’s currency policy, which involves hundreds of billions of dollars in U.S. dollar purchases to prevent rapid appreciation of the yuan. “The instruments are different but the goal is the same,” he said in a Nov. 5 speech in Berlin.

“This is a U.S. countermove in the global beggar-thy- neighbor process,” said Michael Pettis, a finance professor at Peking University and a former managing director at Bear Stearns Cos.

Germany, Brazil

Brazilian Trade Minister Welber Barral said Nov. 3 that Latin America’s biggest economy is “concerned” with the new quantitative easing, also calling it a ‘beggar-thy-neighbor policy,’’ a term used to describe a policy where a country seeks gains at the expense of others. The U.S. was pursuing a “weak- dollar policy,” Japan’s Prime Minister Naoto Kan said on Nov. 4.

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