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China fears impact of foreign financial bubbles bursting

Beijing is looking at ways to protect its domestic market from the possible impact of foreign financial bubbles bursting.

China is worried capital inflows could bring turbulence with them if bubbles burst in foreign markets, its top banking and insurance regulator said on Tuesday.

Global markets are starting to see the side-effects of fiscal and monetary policy steps in response to the Covid-19 pandemic, Guo Shuqing, head of the China Banking and Insurance Regulatory Commission, said. 

Read more: Threat of surge in real estate bonds defaults has China worried 

“Financial markets are trading at high levels in Europe, the US and other developed countries, which runs counter to the real economy,” Guo added.

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

“Financial markets should reflect the situation of the real economy, if there’s a big gap in between, problems will occur and the markets will be forced to adjust. So we are very worried about the financial markets, particularly the risk of the bubble bursting of foreign financial assets.”

China’s benchmark stock indexes gave back earlier gains and the yuan weakened after Guo’s remarks. Both the Shanghai Composite index and the blue-chip CSI300 index lost more than 1% at the close.

CAPITAL INFLOWS

Steady capital inflows against the backdrop of widened interest rate differentials between China and other major economies have supported the Chinese currency.

Guo also highlighted bubble risk as a core issue facing China’s property sector. “It is quite dangerous that many people are buying homes not for living in, but for investment or speculation.”

If the housing market goes down, the value of properties held by people will suffer from huge losses, leading to a vicious cycle of unpaid mortgages and economic chaos, he said.

Guo said China would continue some policies, including pushing banks to surrender some profits, to support the real economy, but he expected lending rates to rise this year in tandem with higher market interest rates.

RATES REBOUND

“Because market interest rates have been picking up this year, I expect lending rates to rebound also,” Guo said.

Policymakers will scale back support for the economy this year after last year’s raft of stimulus measures, but will tread warily for fear of derailing a recovery that remains uneven, as consumption lags and small firms struggle, policy insiders said.

The central bank is widely expected to keep its benchmark lending rate – the loan prime rate (LPR) – steady this year.

  • Reporting by Reuters

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Sean OMeara

Sean O'Meara is an Editor at Asia Financial. He has been a newspaper man for more than 30 years, working at local, regional and national titles in the UK as a writer, sub-editor, page designer and print editor. A football, cricket and rugby fan, he has a particular interest in sports finance.

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