Emerging economies criticize inflows of unwanted capital

The governor of China's central bank, Zhou Xiaochuan, urged the United States to take greater responsibility for the global effects of its monetary-easing policies, given the dollar's position as the world's major reserve currency.

Zhou said China understood that the US needed to stimulate its economy by taking certain measures, but the US Federal Reserve, the country's central bank, has "responsibility for the global economy, not only for the US economy".

The Fed should be aware of the global effects and keep its injections of money within the US economy, as easing policies in the US usually drives huge capital inflows into emerging economies, he said.

Zhou made the remarks while attending the Boao Forum for Asia in Hainan province.

Fed Chairman Ben Bernanke said last week that the bank will consider further stimulus, even after upgrading its economic outlook on March 13, the financial news service Bloomberg reported.

"Once again the green shoots of US recovery are being cut down by economic reality," said Douglas Borthwick, managing director of the foreign-exchange consultants Faros Trading.

"The third round of quantitative easing remains on Bernanke's table, and I believe any retracement higher in the US dollar index, or a depreciation of the euro against the dollar will prompt further jaw-boning from Fed doves that will point to renewed QE3."

Emerging economies have criticized the US for the previous two rounds of quantitative easing, which failed to maintain enough liquidity within its domestic market and sent unwanted cash into emerging markets, spurring inflation among those nations.

Edmund Phelps, a Nobel Prize-winning economist and Columbia University professor, said the Fed deserves a high score for its positive monetary policy choices, because the second round of QE pulled back the inflation rate and addressed the increasing demand for liquidity on time.

He said capital inflow into China from the US was partly due to the virtually fixed yuan exchange rate, and if the dollar could depreciate against yuan, the liquidity generated in the US would not flow so much to China.

"If the US thinks other countries should take responsibility for their own losses when it is creating huge liquidity, those countries should let their currencies appreciate no matter how much cash the Fed prints ... many economies won't agree," said Zhou.

The world hasn't yet recovered from the financial crisis, and there are new factors that could push the global economy back into recession, he warned.

For China and some other emerging economies, the policy aim is to gradually cool inflation and achieve a so-called soft landing, Zhou said.

"There are many obstacles to realizing a soft landing," he added. "Sometimes it's very difficult to judge whether the policies are too strong or too weak."

He said China takes global liquidity very much into consideration when making decisions on monetary actions, and is usually hesitant to use price-based mechanisms, such as interest rates, because it might lead to more capital inflow when global liquidity is high.

China is also encouraging capital to flow out by loosening the reins on outbound investment by enterprises and individuals, Zhou said.

"But given investors' lack of offshore experience, China will still witness an imbalance between capital inflows and capital outflows for a while."