The Daily Telegraph

China alarmed by US money printing
The Daily Telegraph

The US Federal Reserve’s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to « credit easing ».

« If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies, » he said. China’s reserves are more than – $2 trillion, the world’s largest.

« Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets, » he added. The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets. « This is where Greenspan went wrong from 2000 to 2004, » he said. « He thought everything was alright because inflation was low, but assets absorbed the liquidity. »