Commentary on Political Economy

Tuesday 18 January 2022

TELL THIS RAT HE IS DREAMING. WE WILL NOT REST UNTIL RATLAND IS DESTROYED!

 Xi urges the West not to lift global interest rates

London/Tokyo/Sydney | Chinese President Xi Jinping has urged the West not to increase interest rates because he fears it will stoke capital outflows from his slowing economy while triggering an emerging market crisis among many of the developing countries Beijing has lent money to, experts say.


Mr Xi used a speech delivered online at the World Economic Forum late on Monday (AEDT) to urge Western countries not to raise interest rates, warning that “slamming on the brakes” could “challenge global economic and financial stability”.



Chinese President Xi Jinping delivers a speech to the virtual Davos forum. AP

As markets on Tuesday digested Mr Xi’s extraordinary intervention in global monetary policy, his warnings were given weight by a World Bank report which said the world’s poorest countries would face a surge in debt repayments this year if the United States tightened.


“You can see why he wants to persuade the rest of the world not to tighten while China is easing because it will lead to capital outflow out of China which may reignite their foreign exchange problems,” Stephen Joske, a former Australian Treasury representative in Beijing, told The Australian Financial Review.


“The other problem is that out of the major developed countries China has the worst debt situation, so this really adds fuel to the fire. Part of their propaganda line is blaming any macro problem on the US.”


John Edwards, a former Reserve Bank board member and former economic adviser to treasurer Paul Keating, said: “Xi is now acting as a global economic leader recommending a course of action that a global economy should follow, similar to his speech a few years ago about China’s willingness to lead globalisation.”


A day after China’s central bank announced it was cutting key lending rates, economists predicted a string of additional reductions in the next two months to stave off financial contagion from the debt-heavy property sector and ensure growth in the world’s second-largest economy does not slip below 5 per cent. However, they said it was unlikely Mr Xi’s call would influence the direction of US interest rates.


People shop for Lunar New Year decorations in Beijing. A property downturn, debt curbs and strict COVID-19 have hit consumption.

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His comments on global monetary policy came as China’s central bank went the opposite way, slashing interest rates on several forms of short-term borrowing as Beijing battles against a property crunch and an omicron-related economic slowdown.


Mr Xi called for stronger international co-ordination on fiscal and monetary policy – at a time when policies in the West and China are pulling in different directions – saying “major economies should see the world as one community”.


In a speech to a week-long “virtual Davos” organised by the Switzerland-based World Economic Forum, Mr Xi also spelt out Beijing’s preference for trickle-down economics, and vowed to “continue to let the market play a decisive role in resource allocation”.


“The common prosperity we desire is not egalitarianism,” said the head of the Chinese Communist Party. “To use an analogy, we will first make the pie bigger, and then divide it properly through reasonable institutional arrangements.”


Emerging markets are braced for capital outlfows as higher interest rates in the US and other Western countries draw yield-seeking money out of their economies, weakening currencies. This, in turn, leads to imported inflation, which many developing countries have started counteracting with higher interest rates, which can then crimp the post-pandemic recovery.


Weaker currencies also drive up the cost of servicing foreign debts.


The World Bank this week warned that a group of 74 low-income nations will have to repay an estimated $US35 billion to official bilateral and private-sector lenders during 2022, up 45 per cent from 2020.


“Countries are facing a resumption of debt payments at precisely the time when they don’t have the resources to be making them,” said David Malpass, World Bank president.


Even after acknowledging the global supply-chain crunch, high commodity prices and tight energy markets, Mr Xi called on Western central banks to sit tight.


“If major economies slam on the brakes or take a U-turn in monetary policies, there will be serious spillovers that will present challenges to global economic and financial stability, and developing countries will bear the brunt of it,” he said.


He urged major economies to “co-ordinate the objectives, intensity and pace of fiscal and monetary policies”.


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The US, Britain and to an extent Europe face runaway inflation because of a combination of supply squeezes and pent-up demand caused by the COVID-19 pandemic.


Although some inflationary pressure could be relatively short-lived, prices are increasing so sharply that many central banks, led by the US Federal Reserve, are signalling an end to loose monetary policy.


In China, by contrast, the big worry is an economy that grew at only 1.6 per cent on a quarterly basis at the end of last year, following a spate of COVID-19 outbreaks that forced the closure of some factories, ports and airports as authorities sought to contain the virus.


China’s property sector is Beijing’s other main worry, as developers like Evergrande struggle to repay interest on huge loans.


Mr Xi was signalling concern that rising interest rates elsewhere in the world could pour yet more cold water on China’s economy, which he is trying to fire up with fiscal and monetary stimulus.


“Shifts in the domestic and international economic environment have brought tremendous pressure, but the fundamentals of the Chinese economy, characterised by strong resilience, enormous potential and long-term sustainability, remain unchanged,” Mr Xi said.


Although he claimed to speak on behalf of developing countries – saying the West’s tighter monetary policy would particularly hurt them – he also acknowledged he was under pressure to keep growth going at home.


“We still have much hard work to do in the longer run” on developing the Chinese economy, he said. This included the need to make “more visible and substantial progress in the well-rounded development of individuals”.


Although Mr Xi has been criticised for turning China’s back on the path to market liberalisation, his speech was laced with economic rationalism.


“As a rising tide lifts all boats, everyone will get a fair share of that,” he said, rejecting active redistribution in favour of the trickle-down theory of economic growth. He promised a market-based system that did not favour some economic actors over others, although he did not mention the heavily favoured state-owned enterprises.


“We will build a unified, open, competitive and orderly market system where all businesses enjoy equal status before the law, and have equal opportunities in the marketplace,” he said.


China President Xi Jinping.

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Pandemic politics

Mr Xi also urged other countries to not try to hold China responsible for the COVID-19 pandemic, which has been sourced to the city of Wuhan.


“Holding each other back, or shifting blame, will only cause needless delay in the response, and distract us from the overall objective,” he said.


Again playing the role of developing-country champion, he highlighted the 2 billion-plus doses of vaccine China had distributed to more than 120 countries and international organisations.


He pledged another 1 billion doses to Africa, including 600 million as donations, and 150 million to the countries of south-east Asia.


“China is a country that keeps its promises,” he said.

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