German finance minister: expansive policies may have laid foundation of next crisis

Feb 28, 2016, 03:32

Zhou urged that the gathering focus on managing lackluster global demand, structural economic reforms and promoting "sustainable and balanced" growth.

"We don't need to launch a global fiscal stimulus package", he said in Hong Kong, but added some countries "may have more capacity and should use their budgetary capabilities to support global growth".

"The pace will vary, but the reform will be set to continue and the direction is not changed", Zhou said at a conference held by the Institute of International Finance in Shanghai in conjunction with a G20 meeting of central bank governors and finance ministers.

International Monetary Fund (IMF) chief Christine Lagarde said China faced an "overwhelming" agenda of structural reforms as its leaders open up financial markets and move the economy away from debt-fueled investment.

Germany's finance minister, Wolfgang Schauble, said fiscal stimulus has "reached its limit".

In a video message, Chinese Premier Li Keqiang said that the world's second-largest economy has the confidence to handle the complex economic situation at home and overseas.

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"The 3-per cent warning line does not fit with China's reality", he said, citing China's relatively small outstanding debt, rational structure, continued growth in fiscal revenue and solid assets of state firms as among the factors to back his argument.

This year the Bank of Japan and the European Central Bank (ECB) adopted negative interest rates and huge quantitative easing programmes.

Germany, with French support, objected Friday to launching a fiscal and monetary stimulus package to boost global growth, saying only structural reforms would work now.

"Monetary policy is extremely accommodative, so that they could become counterproductive, in view of their adverse effects", he argued at a conference preceding the meeting in Shanghai of the central bankers of the G20.

Meantime, Bank of England Governor Mark Carney warned his colleagues against getting embroiled in a currency war by pushing interest rates too low. "We are lacking in policy implementation". "That's competing in a beggar-thy-neighbor way to share a pie that's either frozen or shrinking, and it doesn't lead anywhere good".

The two top economic policy makers agreed that the two neighboring countries have made notable progress in economic cooperation including the won-yuan direct trade market, following the summit meeting in October previous year. "That means the volatility in exchange rates is likely to remain high for the time being, lacking any clear trends." said Commerzbank in a research note. USA budget policy has proved a constant battleground between Republicans and Democratic President Barack Obama.

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Mike McCudden, head of derivatives at stockbroker Interactive Investor, said investors had ended the week "cautiously optimistic", with all eyes on the G-20 for clues to future action. "Stocks may sell off a bit".

First, China's saving rate is high, up to almost 50 percent, much higher than about 10 percent in many countries.

Yet central bank governor Zhou said Friday that while China wanted to develop its equity markets, it would take time for them to mature.

Shanghai's benchmark stock index tumbled 6.4 percent on Thursday, recalling painful memories of August past year, when the market experienced free falls for weeks following the Chinese authorities' currency depreciation.

Tom Cahill of Ventura Wealth Management said that, after the inflation report, if similar strength shows up in next week's ISM survey reports on economic activity in February, and the government jobs report for the month, a sell-off could be in order.

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