China must be mindful of spillover effects of Fed's interest rate hikes
China Daily | Updated: 2022-01-10 07:56
Two years into the COVID-19 pandemic, the global economic order is far from returning to normal. In order to prevent the pandemic from further spreading, a series of measures have been taken globally to control travel and transportation, which has dragged the tourism and logistics sectors into recession.
Worse, the US Federal Reserve has implemented an almost unlimited loose monetary policy, which has pushed up the prices of energy, food grains and other commodities. The recession and the inflation combined have put political pressure on some fragile developing countries such as Kazakhstan.
In Turkey, the inflation rate soared to 20 percent. In Sri Lanka, the inflation rate was as almost 11.1 percent. A common point for these economies facing high inflation is that they rely heavily on the international market for growth. Turkey, for instance, relies heavily on energy and industrial raw materials imports, while Sri Lanka relies heavily upon international tourism.
Worse, some developing countries have seen their governments' capability to subsidize daily necessities being weakened. Kazakhstan is suffering from social unrest because it tried to cancel natural gas subsidies, which caused prices to rise. In Egypt, the government tried to cancel the decades-long food subsidies.
China imports large quantities of energy and soybeans. And the government has been efficient in arranging increased imports since the outbreak of the pandemic and ensured a steady supply of basic commodities. It is fair to say that China has done very well in economic recovery and avoiding risks, especially avoiding inflation and currency depreciation. In 2021, the renminbi appreciated by 2.3 percent over the whole year.
In 2022, the US government plans to cope with the rising inflation by increasing interest rates, as the inflation has already dragged down the approval ratings for the Joe Biden administration. In 2022, developing countries might face spillover effects from higher US interest rates, which will increase the risks of inflation and debt risks.
That will be a huge challenge to all developing countries. China must also be cautious and keep a watchful eye on the situation. It must continue to ensure stable supplies of energy and grains, and further boost domestic demand so as to cope with the possible decline in exports. Especially, it is necessary to strengthen cooperation with countries participating in the Belt and Road Initiative and evaluate possible risks to better ensure energy security.