Emerging-Market Countries Criticize Fed Decision

Emerging-Market Countries Criticize Fed Decision
By BETTINA WASSENER
Published: November 4, 2010

HONG KONG — Policy makers in emerging markets criticized the Federal Reserve on Thursday for its decision to pump more money into the U.S. economy, a measure that they fear could escalate the worrisome influx of cash into fast-growing economies.

Officials from countries like Brazil and Thailand threatened more measures to curb the flood of money that has pushed up currency values and fueled concerns that asset price bubbles might be in the making.

The unusually sharp backlash against the Fed’s action underscores the disagreement among some of the largest economies in the world over appropriate economic policy and is likely to overshadow a gathering of leaders of the Group of 20 top economies in Seoul at the end of next week.

The Brazilian foreign trade secretary, Welber Barral, said the Fed’s policies would impoverish “those around them and end up prompting retaliatory measures,” according to Reuters. In South Korea, the Finance Ministry said it would consider ways to limit capital flows.

While some inflows, particularly long-term investments, are welcome ways of bolstering economic development, the capital influxes into emerging market stocks, bonds and property have increased rapidly in recent months, totaling more than $2 billion a day, according to estimates by DBS in Singapore.

Analysts and policy makers are concerned that the Fed’s injection of more liquidity into the U.S. economy — through purchases of Treasury securities to the tune of $600 billion — could lead to yet more inflows as investors seek higher returns.

“As long as the world exercises no restraint in issuing global currencies such as the dollar — and this is not easy — then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,” Xia Bin, an adviser to the central bank of China, wrote in a newspaper managed by the People’s Bank of China.

In Thailand, Finance Minister Korn Chatikavanij said the central bank governor had “confirmed discussions with central banks of neighboring countries, which are ready to impose measures together, if needed, to curb possible speculative money flowing into the region,” according to Reuters.

Norman Chan, chief executive of the Hong Kong Monetary Authority, warned that the Fed’s new measures — informally known as QE2, denoting the second round of what is called quantitative easing — added to the risk of asset bubbles, including a bubble in the city’s housing sector.

“For emerging markets, QE2 means a guarantee of the ‘low for longer’ scenario through the first half of 2011, which suggests inflows into emerging markets will continue, if not strengthen,” Richard Yetsenga and Pablo Goldberg, analysts at HSBC, said in a note on Thursday. “The tide generated by the liquidity from abroad is bigger than whatever wall emerging market countries can put up.”

Misgivings about the Fed action appeared confined to emerging markets, but Germany’s economy minister, Rainer Brüderle, also weighed in. “I view that not without concern,” Reuters quoted Mr. Brüderle as saying. It said he added that measures were needed to stimulate growth in the United States and that it was not enough to add liquidity alone.

The French economy minister, Christine Lagarde, said Thursday that some emerging countries’ angry reactions to the Fed’s latest round of easing highlighted the need for an overhaul of the global monetary system. Asked about some emerging countries’ reactions, Ms. Lagarde said: “It confirms the imperative need to forge tools for monetary calm,” according to Reuters.

The president of the European Central Bank, Jean-Claude Trichet, said he did not think the U.S. was pursuing a weak dollar policy, Reuters reported from Frankfurt.

Mr. Trichet said he had “no indication that would change my trust” that the Federal Reserve, the U.S. Treasury and President Barack Obama “aren’t playing a tactic of a weak dollar,” Mr. Trichet said. “I have no reason to think that.”

While the United States argues that China in particular should allow its currency to appreciate more rapidly, China and other emerging markets are loath to do so. They argue that the additional round of quantitative easing by the Fed is hurting the value of the dollar artificially while prompting more cash to flow into emerging nations as investors seek the higher interest rates in such countries.

Although finance ministers who gathered at a preparatory meeting in South Korea last month pledged to refrain from weakening their currencies and to let the markets exert more influence in setting foreign exchange rates, a concrete agreement on current account limits, proposed by the U.S. Treasury secretary, Timothy F. Geithner, is likely to prove elusive.

Many emerging-market countries and Japan have been intervening in the foreign exchange markets in an effort to slow the rise in the values of their currencies, which they fear could harm export industries by making exported goods and services more expensive for overseas consumers.

Partially as a result of currency inflows, the yen is up 15 percent against the U.S. dollar this year. The Thai baht is up 11 percent, and the South Korean won has gained 5 percent.

Some countries have also already announced or signaled steps to discourage capital inflows. Brazil and Thailand, for example, raised taxes last month on foreign investment in government bonds, a step designed to deter excessive inflows.

Capital controls have so far not been “too Draconian,” said Yougesh Khatri, senior Southeast Asia economist at Nomura, in a conference call from Singapore on Thursday. But the risk is that such measures might escalate in the longer term, he added, while more foreign exchange intervention is likely.

The Hang Seng index in Hong Kong rose 1.6 percent Thursday, while the Nikkei 225 index in Japan played catch-up after a public holiday, gaining 2.2 percent.

The Kospi in South Korea edged up 0.3 percent, while the Straits Times index in Singapore was up 0.5 percent by late afternoon.

http://www.nytimes.com/2010/11/05/business/global/05global.html?_r=1&src=me&ref=business