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China sounds the alarm on a global market bubble

Guo Shuqing, Communist Party boss 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 foreign financial asset bubble will one day burst,” said Guo, who is also chairman of the China Banking and Insurance Regulatory Commission.

Guo’s warning follows concerns voiced elsewhere this bubble-like behavior is spreading in financial markets. Wall Street banks have answered customer questions about whether the stock boom would be followed by a crash resembling the dot-com bubble burst 21 years ago.

Guo echoed these fears, adding that the recoveries in the US and European markets do not reflect the underlying economic challenges the two regions face as they attempt to recover from the brutal pandemic recession.

“Phone [a] The bursting of the bubble could trigger large inflows of foreign capital to 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 in financial markets. A huge influx of funds into China could destabilize the world’s second largest economy by rapidly inflating its currency, assets and prices.

The Chinese banking executive also said he was concerned whether China’s real estate sector was also exposed to the risk of volatility – an issue that analysts say implies the country may be ready to tighten its purse strings. . President Xi Jinping told an economic conference late last year that the country should stabilize the real estate market in 2021, and Beijing has already taken steps to do so. In December, regulators published rules to limit lending to the real estate sector.

Local governments in China, meanwhile, have stepped up measures since the start of this year to cool the market, in particular by limiting purchases and curbing developers.

The shaken markets

Guo’s remarks rocked the markets in the region. The Shanghai Composite (SHCOM) and Hong Kong Hang Seng Index (HSI) were both on the rise ahead of Guo’s speech, building on the Wall Street rally on Monday. But the two indices reversed their course soon after. The Shanghai benchmark fell 1.2%, while the Hang Seng fell 1.3%.
Other indexes in the region also fell: Australia’s S & P / ASX 200 fell 0.4%, while Japan’s Nikkei 225 (N225) fell 0.9%. South Korea Kospi (KOSPI) was the outlier, trading up 1% after markets closed Monday for a public holiday.

“This indicates how sensitive the markets are to the removal of political accommodations,” wrote Stephen Innes, chief global markets strategist at Axi, in a note Tuesday. “He also points out that central banks will operate at different speeds to get out of last year’s crisis.”

Guo’s comments also reflect Beijing’s concerns about the risk that rising debt poses to the economy. Home loans accounted for nearly 30% of total loans issued in yuan at the end of 2020, according to central bank data.

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

China spent hundreds of billions of dollars last year in an effort to consolidate the country’s economy after the outbreak of the pandemic. Its efforts to boost activity – including through large infrastructure projects and offering cash distributions to boost citizens’ spending – seemed to bear fruit, as the economy grew 2.3% l last year.
Now the country is looking to maintain this momentum while measuring the level of monetary support that will actually be needed. It also balances the recovery with a plan to ensure that around 40% of its population receives Covid-19 vaccines by the end of June – a number that represents more than half a billion people.


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