The U.S. Federal Reserve's interest rate cuts have helped increase liquidity, but have also led to rising prices in commodities, Zhou Xiaochuan, governor of the People's Bank of China, said on Friday.

The central bank governor said this has affected the anti-inflation policies of emerging markets.

Zhou was speaking at a conference following the release of a report by the Commission on Growth and Development, an international organization that focuses on policy consultation in emerging markets, and provides reference for aid programs.

"The U.S. Fed has significantly reduced interest rates on the other hand, global commodity market prices have risen. A lot of developing countries are now suffering from rising inflation," Zhou said.

The central banks of the world should cooperate more closely to tackle the inflation problem, he said.

On another issue, he said experts may have exaggerated the amount of "hot money" which has flowed into China.

"I've always held that it is not a comprehensive approach to simply look at trade surplus and FDI (if you calculate speculative capital inflows) you have to make a comprehensive check of the overall international balance of payments," he said.

Hot money, which triggered the Asian financial crisis in 1997, is being carefully watched in China, especially with the appreciation of the yuan and high inflation.

China's reserves, the world's largest, have increased rapidly this year. By the end of March, the reserves stood at 1.68 trillion U.S. dollars, increasing by 154 billion follars in the first quarter.

During the same period, China's trade surplus was 41.4 billion dollars while the FDI was 27.4 billion dollars. Many analysts suspect the 85 billion dollars gap was hot money that flowed into China in anticipation of the yuan appreciating.

In April, the stockpile grew by a further 74.46 billion dollars, with the total reserves swelling to 1.76 trillion dollars, a Reuters report said, citing a source familiar with the data.

The increase in the reserves in April was about 50 billion dollars, more than the total of China's trade surplus of 16.7 billion dollars plus FDI of 7.6 billion dollars.

However, Zhou said many of the various accounts in the country's balance of payments could contribute to the expanding foreign exchange reserves.

"For example, we also have services trade and income on the current account (that affects the level of the reserves). And the financial markets are increasingly more sophisticated now," Zhou said, referring to the complicated currency derivatives that can affect the level of foreign exchange reserves.

(China Daily May 31, 2008)