China is sounding the alarm about a global market bubble

by

Guo Shuqing, head of the Communist Party at the People’s Bank of China, told reporters in Beijing on Tuesday that confidence in Chinese markets could be affected by volatility around the world.

“We are really afraid that the balloon for foreign financial assets will burst one day,” said Guo, who is also chairman of China’s Banking and Insurance Regulatory Commission.

Guo’s warning follows concerns expressed elsewhere that bubble-like behavior is spreading in the financial markets. Wall Street banks have asked customers questions that the fleeing stock boom will be followed by an accident similar to the dot-com bubble explosion 21 years ago.

Guo countered such fears, adding that rallies in the US and European markets do not reflect the underlying economic challenges facing both regions as they try to recover from the brutal pandemic recession.

“Such [a] the bubble could trigger substantial inflows of foreign capital into China, “Mizuho Bank analysts wrote in a research note, adding that the regulator said it would study” effective measures “to encourage the free movement of capital. , while avoiding shocks to financial markets. A huge pile of funds in China could destabilize the world’s second-largest economy, quickly inflating its currency, assets and prices.

The Chinese banking leader also said he was concerned that China’s real estate sector was also at risk of volatility – an issue that analysts say the country could be prepared to tighten. President Xi Jinping said at an economic conference late last year that the country needs to stabilize the real estate market in 2021, and Beijing has already taken some steps to do so. In December, regulators issued rules to limit lending to real estate.

Local governments In China, meanwhile, measures have intensified since earlier this year cool the market, including by restricting purchases and controlling developers.

Shaken markets

Guo’s remarks shook markets in the region. Shanghai Composite (SHCOM) and those in Hong Kong Hang Seng Index (HSI) Both were on an upward trend before Guo’s speech, building on the Wall Street rally on Monday. But both indices reversed immediately. Shanghai’s benchmark fell 1.2%, while Hang Seng fell 1.3%.
Other indices in the region also fell: S & P / ASX 200 in Australia fell 0.4%, while Japan Nikkei 225 (N225) decreased by 0.9%. South Korea Kospi (KOSPI) was the previous value, trading 1% after the markets there were closed on Monday for a holiday.

“This indicates how sensitive markets are in terms of eliminating policy cases,” Stephen Innes, Axi’s chief global market strategist, wrote in a note on Tuesday. “It also emphasizes that central banks will run at different speeds to move away from last year’s crisis.”

Guo’s comments also reflect Beijing’s concerns about the risk of rising debt to the economy. Real estate loans accounted for almost 30% of total yuan loans by the end of 2020, according to central bank data.

Warren Buffett sees nuances of the 1980s crisis in today's bond market

And some in China have already suggested that it is time for the country to reduce fiscal and monetary support – including former finance minister Lou Jinwei, who in December said a “gradual exit” from free politics would help stabilize and, in followed by reducing China’s debt ratio.

China spent hundreds of billions of dollars last year in an attempt to strengthen the country’s economy after the pandemic hit. Its efforts to stimulate activity – including through major infrastructure projects and the provision of cash documents to stimulate spending among citizens – have seemed to pay off, as the economy grew by 2.3% last year.
Now, the country is trying to maintain this momentum while measuring how much monetary support will be needed. It also balances the recovery with a plan to ensure that about 40% of its population receives Covid-19 vaccines by the end of June – a number that amounts to more than half a billion people.

.Source