A sales assistant hangs a sale sign in a store on Oxford Street in London, UK.

China’s central bank warned that its counterparts in developed nations face difficult choices as monetary easing threatens to cause “severe” inflation and exchange-rate volatility.

China, the owner of US$801.5 billion of Treasuries, pressed the US at a summit in Washington last month for economic polices to protect the dollar’s value. The Bank of England is poised to end a five-month program of bond purchases, part of so-called “quantitative easing,” according to a Bloomberg News survey of firms bidding at government debt auctions.

“The discussion about quantitative easing and the reversal of it is going to capture the market’s attention for the rest of this year,” said Tai Hui, head of Southeast Asian economic research at Standard Chartered Plc in Singapore. “The fact that China is talking about it, again, is reflecting its concern about its holdings of US Treasuries.”

Quantitative easing is the creation of new money to purchase government or private assets, including bonds, to encourage new bank lending.

Great depression

Exiting too quickly from such policies, which the Chinese central bank said helped to prevent a repeat of the Great Depression, may undermine an economic recovery, Wednesday’s report said. Waiting for too long may trigger “a new round of asset bubbles and severe inflation,” the central bank added.

“Central banks in major developed nations face a difficult choice between keeping government bond yields relatively low to promote economic recovery and maintaining currency stability” to protect national creditworthiness, it said.

Consumer prices are falling in the US, China and Europe from a year earlier as rising unemployment and the worst economic slump since World War II smother demand.

The US and China engaged in “a lot of discussion” at last month’s meetings in Washington on the appropriate timing for withdrawing economic stimulus, David Loevinger, the Treasury’s senior coordinator for China affairs, said July 27.

‘Fragile’ recovery

“There was general agreement that it was very important that this doesn’t occur too soon because the recoveries are still very fragile, but also an acknowledgement that they have to take place at the right time, and not let another set of imbalances and bubbles build up in the economy,” Loevinger said.

China’s central bank pledged in Wednesday’s report to maintain a “moderately loose” monetary policy, fine-tuning where necessary, and to guide “appropriate” lending growth, reiterating that the nation’s recovery is not yet on solid foundations.

An explosion in credit is fueling concern that China’s banks are taking on too much risk and bubbles are inflating in stocks and property. New lending tripled to more than $1 trillion in the first half of 2009 from a year earlier and the Shanghai Composite Index has climbed 88 percent this year.

Source: Bloomberg