Liu Mingkang, China’s top banking regulator, speaking at the International Finance Forum in Beijing on November 15, said that U.S. monetary policy is generating a tremendous amount of speculation in global asset markets, and risks prolonging any economic global recovery while those policies remain in place.
What Liu is referring to is the commitment to a weak U.S. dollar and continuing low U.S. dollar interest rates, which has brought the U.S. dollar to the point of being the carry trade currency of choice.
Carry trade is when a low-interest currency is sold by investors in order to buy units that bring higher yields. The yen has been the major currency investors used for the carry trade for a long time, but the zero-percent interest rate policy of the Federal Reserve has made the U.S. dollar the carry trade currency being flocked to to take advantage of the currency spreads.
China, with is general policy of having its currency move in unison with the U.S. dollar, isn’t affected as much as its competitors in the surrounding region, which struggle as their currencies strengthen against the greenback, making it harder to compete in the export markets, as well as the domestic U.S. manufacturing market, which benefits from weaker U.S. dollar, making their products more competitive with foreign products. Because China’s currency moves as the U.S. dollar moves, their exports aren’t affected in any meaningful way like other currencies are.
China and Asia aren’t the only ones concerned though, as Europe is getting more wary as well, with the euro continues to strengthen against the dollar, making their products also harder to compete against American domestic products and Chinese exports.
Other Asian countries, who have also been pressuring for a stronger U.S. dollar, have resorted to buying up the currency in hopes of pushing it up in value in order to compete better in the American and global markets. They’re doing this because, in spite of protests, understand the U.S., for now, is going to do nothing to change its monetary policy, so they’re using the tools they can and taking matters into their own hands.
Until and unless the U.S changes its policies and China allows the yuan to increase in value, things will remain like they are, which is the part of the concern Liu was referring to concerning the possibility of derailing global economic recovery once it truly begins.
As for the carry trade in U.S. dollars, concerns are it will continue to increase speculation which would have a strong effect on global asset prices. That could result in even more speculation in real estate and stock markets, possibly creating yet another bubble.
