The US Federal Reserve cut its benchmark interest rate by another aggressive 75 basic points on March 18. This expected rate cut has fed the market again with ample liquidities, giving the global markets another reason for rallies. Driven by neighboring markets, the Shanghai A-share stock market rose over 2.5 percent on March 19.

Ben Bernanke, the most powerful central bank governor, seems to have become addicted to the rate-cut prescription. In the past months, people have become accustomed to expecting more rate cuts when the Federal Open Market Commission meeting appeared on the calendar.

Rate cuts could be useful in the short term for easing investor concerns amid the sub-prime credit crisis. But this will do no good to the fundamentals, and only generate another asset bubble.

For China, the fast decreasing US interest rate is extremely harmful. It drives up the exchange rate of the yuan against the dollar, hits China's exports to the US and also makes the Chinese government's battle against inflation more difficult.

Right now, the interest rate gap between the US and China has been enlarged to 1.89 percent. This means more hot money, seeking higher returns through yuan appreciation and the interest rate gap, will keep flowing into China. Tens of billions of yuan in hot money has entered China, causing a surge in China's real estate prices and stock markets.

Now, at a time when the A-share stock market is at a year-low level, the surge of hot money will likely bring another round of boom. The money could also find its way into other financial or commodity assets, pushing China's domestic prices up even higher.

China's Consumer Price Index (CPI) rose to a record-high 8.7 percent in February, despite the Chinese central bank's vow to keep CPI within 4.8 percent this year. Now that the Fed has cut the interest rate significantly, China has been left in a much more difficult position to fight inflation from.

China has less room to raise its interest rate. Instead, the People's Bank of China has announced that it will raise the commercial banks' reserve requirements by 0.5 to 15.5 percent on March 18. In this way, China hopes to absorb more money from the market and control the credit growth in banks, but spare a rise in financing costs for enterprises.

The Fed rate cut also hurts China by spurring a faster appreciation of the yuan. The exchange rate between the yuan and the dollar has reached 7.07, and market watchers believe it's just a matter of time before the exchange rate breaks the key seven level. This has already induced a significant slow-down of Chinese exports.

Moreover, a faster appreciation of the yuan will leave more export-oriented Chinese companies in limbo. The government goal of eight-percent GDP growth in 2008 now relies more on the domestic consumption.

Until now, we can't see any sign for an end of the Fed's rate cuts. The tools available for the Chinese central bank have become increasingly limited. The joy of the Wall Street is turning into a headache for the East.

Always bear in mind that the global markets are entangled. Thus, a worsening Chinese economy will in the end harm Americans too. Bernanke, together with the US administration, should come up with some more creative measures. Otherwise, another financial crisis will be just around the corner.

Zhang Hong is the Economic Observer Online's vice-chief editor.