The $787 billion American Recovery and Reinvestment Act, one of the biggest economic rescue efforts in U.S. history, was signed into law by US President Barack Obama on Tuesday. Obama's stimulus package was designed to create about 3 to 4 million jobs for the US through large-scale investments and tax breaks, focusing on both employment and future economic growth. It will truly spur US economic growth and greatly benefit global economic recovery. However, President Obama's recipe may not have a very quick result.

This plan is sure to come with a huge budget deficit which will, to some extent, have counteraction against his efforts to spur the US economy. It may possibly cause strong "side effects" in three aspects, leaving the world disturbed.

First, the risk of a vast depreciation of the US dollar and a new round of financial crisis are not merely over anxieties. The US government's fiscal and budget deficits are recording the highest in history. Where will the money for the stimulus package come from? This is what the American public and the other countries around the world are most skeptical and concerned about. Currently, printing more dollars is the only choice left to the US government and this will certainly lead to a big depreciation of the dollar. For those countries holding large amount of dollar assets, dollar devaluation simply means disaster.

Second, this stimulus plan left a potential hazard of global inflation. In the long run, excessive lending or issuing of more US dollars by the US would lead to an abnormal global fluidity surplus, which may lead, as a possible consequence, to global inflation, presenting the US government as well as the world with gaining difficulties.

Third, the vicious circle of inflation and trade protectionism is another possible side effect. Even though President Obama has several times expressed his opinion that the stimulus plan should not contain protectionism provisions in order to avoid the potential trade war, the US Senate and House of Representatives were both unwilling to follow with the President's idea. The "Buy American" provision in the 787 billion USD plan that was eventually passed uses more moderate wording, but still exists. Although being embarrassed, Obama had no choice but to sign and make it effective immediately, setting a "bad example" of trade protectionism for the world. This step of trade protectionism adopted by the US will trigger trade wars, hurting the recovery of the world economy and not benefit any country, while also deepening the global economic crisis.

US' new stimulus plan has multifaceted impact to the world. China, as the largest creditor nation for the US, shall make clear where the risks lie, in order to get large and stable returns according to actual conditions. It should work against protectionism in all forms but also adopt practical and effective countermeasures to reduce losses from the depreciation of forex assets as much as possible. Calling for the establishment of a stable system focusing on the exchange rate of the major reserve currencies and on restriction of monetary issuance will be a possible choice for China. If it is necessary for China to buy more US treasury securities, China can require a higher entitlement guarantee and a more preferential price. It can also allow foreign governments to issue bonds in renminbi attracting countries that have trade deficits with China. These countries, which are represented by the US, could then issue their own national debts in renminbi and purchase foreign exchange reserves from China, for the purpose of hedging their over-issued currencies to some extent. In this way, in a few years China could convert over half of its foreign exchange reserves into foreign government bonds issued in renminbi, so as to reduce the risks arising from the depreciation of foreign exchange reserves.

By People's Daily Online