China Research

Reading the Fed’s press release from September 17 about unchanged short-term rates in the U.S should lead to reflections why the global nervousness about China was not mentioned explicitly. It could have been for diplomatic reasons. But it also could have been the case that the Federal Reserve feels confused about the real China risks. The words being used in the press release from September 17 about the China risks were as follows: “Recent global and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”.

The questions are: do the Fed’s worries about China mainly concentrate on the enormous drop of the stock market in summer and – possibly – on the mini devaluations of the RMB? Or do general fears of a more pronounced economic downturn in China make the Fed particularly nervous about growth prospects, even for the whole group of emerging countries and the U.S. itself? Does the Fed see more deflationary effects that may come from such a possible negative growth development? Or has the Fed – like global financial markets – only recently started to deal with China risks more systematically which may include all the political, social and economic challenges that China will be confronted with in the forthcoming months and years (and which I discussed and also summed up in this blog many times before). Did the Fed finally find out that the uncertainty about China should be considerably larger than assumed before?

We do know by now, however, that the Fed cares about China. We can come to the same conclusion when it comes to the Swedish central bank – at least when reading the comments of some decision-makers during the previous policy meeting on September 2. But what is their real concern about China more concretely? Is it limited to the possible impact on future inflation in the own country, such as Sweden (which would be too simple)?

It would be nice to know somewhat more about this latter issue, both from the Fed, the Riksbank and other central banks. Finally: What can be said about the China expertise in central banks outside China? I know that the Federal Reserve Bank of San Francisco and Finlands Bank (BOFIT) as part of the ECB are doing ambitious research on China. But what about all the other central banks?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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