China considers ways to manage financial risks associated with inflows

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BEIJING (Reuters) – China is studying ways to manage capital inflows to avoid domestic market turmoil as authorities “very concerned” about the risk of bubbles bursting in foreign markets, its main regulator said on Tuesday banks and insurance companies.

FILE PHOTO: A man stands on an overpass with an electronic map showing the Shanghai and Shenzhen stock indexes in the Lujiazui financial district in Shanghai, China January 6, 2021. REUTERS / Aly Song / File Photo

Global markets are starting to see the side effects of fiscal and monetary policy measures in response to the COVID-19 pandemic, Guo Shuqing, head of China’s Banking and Insurance Regulatory Commission, said at a conference. hurry.

“Financial markets are trading at high levels in Europe, the United States and other developed countries, which works against the real economy,” Guo added.

As the economy has become highly globalized, foreign capital flowing into China will increase dramatically due to the economic recovery and attractive asset prices, Guo said.

“Financial markets should reflect the situation of the real economy, if there is a big gap between the two, problems will arise and the markets will be forced to adapt. We are therefore very worried about the financial markets, in particular the risk of the bubble bursting in foreign financial assets.

China’s benchmark stock indexes retreated from earlier gains and the yuan weakened after Guo’s remarks.

The Shanghai Composite Index and the Blue Chip CSI300 Index lost more than 1% at the close. [.SS]

Constant capital inflows amid widening interest rate differentials between China and other major economies have supported the Chinese currency.

Guo also highlighted the risk of a bubble as a major problem facing the Chinese real estate industry.

“It is quite dangerous that many people buy houses not to live there, but to invest or speculate.”

If the housing market goes down, property values ​​owned by people will suffer huge losses, leading to a vicious cycle of unpaid mortgages and economic chaos, he said.

LOAN RATES MAY INCREASE

Guo said China will pursue certain policies, including pushing banks to forgo some profits, to support the real economy, but he expects lending rates to rise this year along with the rate hike. market interest.

“Because market interest rates have recovered this year, I expect lending rates to rebound as well,” Guo said without giving further details.

Policymakers will reduce support for the economy this year after last year’s round of stimulus measures, but will act with caution lest they derail a recovery that remains uneven, as consumption lags and small businesses are struggling, insiders said.

The central bank is generally expected to keep its benchmark policy rate – the prime lending rate (LPR) – stable this year.

“In order to contain financial risks, Chinese leaders are likely to push ahead with the task of stabilizing macroeconomic leverage,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank in Hong Kong.

“Kicking off a cycle of rate hikes could attract more inflows of foreign capital, we believe the PBOC would stabilize leverage by phasing out pandemic loan support programs and tightening regulations . “

Reporting by Tina Qiao, Cheng Leng, Lusha Zhang, Ryan Woo and Kevin Yao in Beijing; Winni Zhou in Shanghai; See Young Lee in Washington; Editing by Shri Navaratnam and Jacqueline Wong

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