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8 Jan, 2013

Chinese View: US, EU Printing Money Furiously to Shift Debt Burden


(People’s Daily Online Commentary), January 07, 2013 – The United States and the European Union have adopted the policy of quantitative easing, and kept their money-printing machines running around the clock over the past few years. This has increased the imported inflationary pressure facing China, and reduced the value of its huge foreign exchange reserves.

Printing more money to shift debt burden

“The United States and the European Union have adopted the policy of quantitative easing in order to solve their own economic problems,” said Xu Hongcai, deputy director of the Information Department under China Center for International Economic Exchanges. The United States wants to boost employment because it involves the support of voters and domestic political stability. The European Union has had a hard time since the debt crisis erupted, and has thus adopted a loose monetary policy to promote economic growth and to solve social contradictions.

The United States has kept printing more money also to shift its debt burden. Xu said that the debt-ridden country has barely resolved the “fiscal cliff” problem lately through debt monetization, instead of through reducing expenditure and increasing taxes on the wealthy. In other words, it has shifted its debt burden onto other countries through money printing and inflation.

Printing excessive amounts of the U.S. dollar and euro, two international reserve currencies, are bound to exert negative effects on other countries. Xu said that massive money printing may increase inflation risks as well as the prices of dollar-priced international bulk commodities. In fact, international bulk commodity prices have risen in recent months, causing imported inflation in other countries. The money printed by the United States and European Union may pour into emerging economies, hit their financial systems, cause exchange rate fluctuations, and increase the risk of financial regulation.

Purchasing power of China’s foreign exchange reserves dropping steadily

About 70 percent of China’s 3.3-trillion-U.S.-dollar foreign exchange reserves are U.S. Treasuries and dollar assets, and the rest are mostly euro assets. The loose monetary policy adopted by the United States and the European Union has led to the depreciation of the two currencies, and reduced the value and purchasing power of China’s foreign exchange reserves.

“China’s holdings of U.S. debt and dollar assets are suffering huge losses every day. The book value has not changed much, but their real purchasing power has dropped sharply and is still declining steadily. Maybe 10 years later, our over 3-trillion-U.S.-dollar foreign exchange reserves may be worth less than 300 billion U.S. dollars,” economist Xiang Songzuo warned last year.

Xia Bin, director of the Financial Research Institute under the Development Research Center of the State Council, also said that as the U.S. dollar is likely to depreciate for a long time, China, which holds a large amount of U.S. government debt, is worried that the value of its huge foreign exchange reserves will continue to drop.

Vice Minister of Finance Li Yong said that the depreciation of the U.S. dollar and euro has made it more difficult for China to manage its foreign exchange reserves, and already caused heavy losses to the reserves.