Beijing, Seoul Blast Fed Push

By AARON BACK and IN-SOO NAM

BEIJING—Chinese and South Korean central-bank officials criticized the U.S. Federal Reserve’s latest easing efforts and advocated reducing Asia’s dependence on the U.S. dollar.

The comments Thursday, at a joint seminar in Beijing by the two central banks, are the clearest indication yet of a rising backlash in Asia against U.S. monetary policy, suggesting it could speed up the search for alternatives to the dollar as the main global currency.

“The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices,” said Bank of Korea Gov. Kim Choong-soo. “Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations.”

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Chen Yulu, an academic adviser to the People’s Bank of China, said Asia needs a “regional core currency” to reduce its dependence on the dollar. China’s ultimate goal is for the yuan to be as important as the euro or the dollar, he said.

But he acknowledged that will be a slow process, saying it would be possible for the yuan to be fully convertible by 2020, and that the overall yuan-internationalization process may last until 2040. China strictly controls its currency, though it has made small moves to broaden its use globally in recent years and has also allowed a little more flexibility in its movements.

Facing persistent economic stagnation and high unemployment, the U.S. Federal Reserve earlier this month launched a mortgage-bond buying program, its third round of so-called quantitative easing, or QE3.

The Bank of Japan has also expanded its existing easing program, and the European Central Bank has unveiled a plan for potential purchases of the sovereign bonds of stressed euro-zone countries.

The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. This contributes to a monetary-policy dilemma for Chinese authorities, he added. While markets have looked for signs of more forceful action by China’s leaders to rekindle growth, some officials attribute the government’s caution to fears of reigniting inflation.

“On the one hand, China needs to stabilize growth, but on the other hand China is very worried about a property-price rebound,” Mr. Chen said.

At the time of the Fed’s second round of quantitative easing in 2010, many Asian economies looked to tighten, rather than easing, monetary policy as strong growth made them attractive for speculative money. Currently, with the Chinese economy slowing, hot-money inflows are likely to be more subdued.

Two years ago, several emerging-market central banks also faced a painful choice between raising rates to thwart inflation—risking stronger currencies, which would threaten their exports—and leaving rates alone and tolerating inflation. In 2012, with global growth slowing and inflation less of a threat in Asian emerging markets, central banks can more easily row in the same direction as the Fed and ease credit.

The Korean and Chinese economies are also likely to be affected differently by the Fed’s easing. The freer flow of South Korea’s currency, the won, means sudden rushes of capital can destabilize the financial system quickly, while China’s tighter controls means pressures build more slowly.

Mr. Kim of the Bank of Korea is already on the record fretting about the effects of QE3 on Korea. Earlier this month he said that the Bank of Korea may need to take steps to curb the potential influx of liquidity into South Korea.

The PBOC hasn’t made any official comment on the Federal Reserve’s latest bond-buying program since it was unveiled. But Chinese policy makers and government scholars have generally reacted negatively, making similar arguments to those from Mr. Kim, predicting inflationary effects on China as commodity prices rise and capital rushes in.

That fits with the past reaction of the PBOC to previous rounds of quantitative easing. In November 2010, PBOC Gov. Zhou Xiaochuan said in a speech that he understands that the Fed’s mandate is only to look after the U.S. economy, but quantitative easing is having adverse effects on the rest of the world.

“A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world,” he said at the time. “There is a conflict between the U.S. dollar’s domestic role and its international settlement role.”

A year earlier, Mr. Zhou argued in an influential essay that the world should move to a multicurrency system, including an increased role for Special Drawing Rights, a synthetic international currency created by the International Monetary Fund.

Mr. Kim said Thursday that China and Korea should consider making the two countries’ bilateral currency-swap agreement permanent. The three-year agreement allows each country to swap a fixed amount of its own currency for the other’s, facilitating trade in the currencies and serving as a possible liquidity booster during times of crisis. South Korea and China agreed last October to almost double the size of their currency swap agreement to 64 trillion won ($57 billion) or 360 billion yuan, from 38 trillion won.

He told reporters on the sidelines of the forum, that there has been no discussion with his Chinese counterparts on the proposal and declined to give a timeline for changes to the swap line.

Both countries should also try to use the yuan and the won in bilateral trade, to cut costs and reduce their reliance on the dollar in transactions, Mr. Kim said. In the long term, the two countries may consider setting up a won-yuan foreign-exchange market, he added.

Il Houng Lee, a South Korean who currently serves at the chief representative for the IMF in China, said at the seminar that Asian countries can use the yuan as a core currency to settle trade. This can reduce reliance on the dollar and the euro, and can also help improve the efficiency of trade, he said.

But Mr. Lee also echoed Mr. Chen’s assessment that yuan internationalization will be gradual, saying it could take more than 30 years.

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