Xi warns of serious spillovers due to U-turn in developed market monetary policy

Chinese President Xi spoke at a virtual Davos meeting today and said that China remained open to foreign capital but he touched on many topics that could give market watchers reason to worry.

• Xi urged other powers to discard a “Cold-War mentality”
• “The common prosperity we desire is not egalitarianism”
• “We will first make the pie bigger and then divide it properly through reasonable institutional arrangements. As a rising tide lifts all boats, everyone will get a fair share from development, and development gains will benefit all our people in a more substantial and equitable way.”
• “All types of capital are welcome to operate in China, in compliance with laws and regulations, and play a positive role for the development of a country.”
• He warned of “serious negative spillovers” if “major economies slam on the brakes or take a U-turn in monetary policies”
• He said developing countries would also “bear the brunt” of the changes
• “Developed nations need responsible economic policies, should control spillover effects of policies to avoid impacting developing countries.”
• “The global low-inflation environment has notably changed, and the risks of inflation driven by multiple factors
• “We should remove barriers and not build walls. We should open up.”

There’s a long history of higher US rates hurting the developing world. That probably doesn’t hit in a serious way until Fed funds get to 2% so there’s plenty of breathing room. In the shorter term, inflation is going to be the much larger problem.

There remains a big, open question about how hard China leans into common prosperity.