Chinese Finance Minister’s Advice to U.S. Fed: Keep Interest Rates at Zero

https://foreignpolicy.com/2015/10/12/chinese-finance-ministers-advice-to-u-s-fed-keep-interest-rates-at-zero/

BY DAVID FRANCISOCTOBER 12, 2015 - PMDAVID.FRANCIS@DAVIDCFRANCIS

U.S. Treasury Secretary Jack Lew and President Barack Obama often lecture their Chinese counterparts about the need to stop propping up their economy through currency manipulation and government stock purchases, both meant to stop a summer rout in Beijing’s weakening economy. A key Chinese official is returning the favor.

In an interview published Monday in the China Business News, Chinese Finance Minister Lou Jiwei called on the United States to leave its interest rates near zero, something that makes it cheaper for consumers and businesses around the world to borrow American dollars. U.S. Federal Reserve chief Janet Yellen and her colleagues on the central bank’s Open Market Committee have repeatedly put off a rate hike, expected since March, amid fears that it could disrupt the fragile U.S. economic recovery. Right now, U.S. Fed rates range from zero percent to 0.25 percent.

In other words, Lou wants to United States to artificially keep the cost of borrowing low, even as other finance ministers from around the world call on the Fed to raise rates, something that hasn’t happened since 2006. The Fed set borrowing cost near zero in 2008 in a move known as quantitative easing. This was a last-ditch effort to flood the market with cash to boost American economic growth as the United States was on the verge of financial ruin. The policy continues to this day.

In August, as China’s stock market fell 40 percent since June, the People’s Bank of China did something similar when it made available hundreds of billions of dollars for Chinese banks to make loans. Now, as its economy continues to sputter, it’s in Beijing’s best interests for free lending in the United States to continue, because an increase in borrowing cost could have negative spillover around the world, including in China. 

“The United States isn’t at the point of raising interest rates … and under its global responsibilities it can’t raise rates,” Lou said. He added the United States “should assume global responsibilities” because the dollar is a global currency.

Lou, who spoke on the sidelines of the annual meeting of the World Bank and the International Monetary Fund in Lima, Peru, also pushed back against the notion, peddled by the IMF, that China is causing a global economic slowdown. The IMF’s reasoning is this: China’s slowing demand for commodities like oil, rice, and cattle are harming the economies of developing countries like Brazil and Argentina, which rely on the export of raw goods. Lou flipped this script and said the slowdown is the fault of developed nations like the United States.

“It is the continued weak recovery of developed countries [that’s hindering the global economy],” he said. “Developed countries should now have faster recoveries to give developing countries some external demand.”

Also speaking on the sidelines of the IMF meeting, Federal Reserve Vice Chairman Stanley Fischer appeared sympathetic to Lou’s views, at least on interest rates. He said a rate rise by the end of the year is “an expectation, not a commitment.”

“Both the timing of the first rate increase and any subsequent adjustments to the federal funds rate target will depend critically on future developments in the economy,” Fischer said Sunday, adding there are “considerable uncertainties” surrounding U.S. growth.

Fischer then cautioned: “Recent employment reports have been somewhat disappointing and, as always, we are closely monitoring developments that could affect our sense of the economic outlook and the risks surrounding that outlook.”