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szdaily -> World Economy -> 
China, US diverge on stimulus plans
    2021-03-11  08:53    Shenzhen Daily

THE United States and China are pursuing divergent economic policies in the aftermath of the coronavirus recession in a role reversal from last time the world economy was recovering from a shock.

One of the takeaways from the annual National People’s Congress under way in Beijing is a conservative growth goal, with a tighter fiscal deficit target and restrained monetary settings. That’s a big contrast with the United States, where President Joe Biden is preparing a second major fiscal package after he gets final approval for his US$1.9 trillion stimulus.

The widening policy divergence is putting strains on exchange rates and could potentially reshape global capital flows. It stems, in part, from different policy lessons from the 2007-09 crisis.

A stunted and choppy U.S. recovery left key Democrats concluding it’s vital to “go big” on stimulus and keep it flowing. For monetary policy, the moral was: “Don’t hold back” and “don’t stop until the job is done,” U.S. Federal Reserve Chair Jerome Powell said last week.

China’s leaders have a different take. A massive unleashing of credit growth back then led to unused infrastructure, excess industrial capacity and an overhang of debt.

While rapid containment of the pandemic meant the economy didn’t need as much help in 2020, President Xi Jinping and his team are now winding things back to re-focus on longer-term initiatives to strengthen the technology sector and tamp down debt risks.

“Each learned a lesson from the previous episode, and so it is kind of a swap of positions,” said Nathan Sheets, head of global economic research at PGIM Fixed Income and a former U.S. Treasury undersecretary for international affairs.

Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, highlighted in a briefing just days before the opening of the annual legislative gathering that high leverage within China’s financial system must continue to be addressed.

Guo pointed to worries about inflated property prices and the risk of overseas money pouring in to take advantage of the premiums China’s assets offer. He also indicated the nation’s lending rates will likely go up this year.

While U.S. Treasury yields have surged recently, 10-year rates remain less than half those in China, where the central bank has forsworn Western-style zero interest rates or quantitative easing.

“Unlike many of its peers, including the Fed, China’s central bank has continued to calibrate its policy partially with a view to prevent an excessive rise in asset prices,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.

Confronted with currency appreciation risks, China will be hoping for a “well-timed exit from the Fed’s ultra-ease stance.”

As China contends with capital inflows, the United States is likely to be pumping out a greater supply of dollars into the global economy — via a widening current-account deficit — as its growth revs up, supercharged by Biden’s stimulus and the Fed’s easy stance.

“There’s been a regime break,” in the U.S. with the outsize Biden relief bill and a planned longer-term follow-up, said Robin Brooks, chief economist at the Institute of International Finance. As growth soars past 6 percent this year, a wider current-account deficit will be “the pressure valve” given domestic production constraints, he said.

China’s reluctance toward the kind of “go big” message of U.S. Treasury Secretary Janet Yellen dates back many years. After unleashing a fiscal package of 4 trillion yuan (US$586 billion) and an unprecedented surge in broader credit after the 2008 crisis, China was already by 2012 saying it wouldn’t do that again.

(SD-Agencies)

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