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Bubble Risks Test China’s Commitment to No Drastic Policy Change

(Bloomberg) – Despite Beijing’s best efforts, asset bubbles are forming in China and house prices are skyrocketing, prompting officials to revive the idea of ​​a national property tax. A surge in commodity prices prompted the central bank to commit to increasing domestic supply, strengthening market surveillance, and cracking down on speculation and hoarding. Quick wins challenge central bank capacity contain inflation without increasing borrowing costs or drastically changing monetary policy – something the People’s Bank of China has said it will avoid. The risk is that the government’s attempts to curb price increases will not be enough, forcing the central bank to take control at a vulnerable time for domestic consumption, which would be a shock to the country’s financial markets, which are pricing in. a relatively benign scenario. The 10-year government bond yield fell to its lowest level in eight months, while the benchmark CSI 300 stock index is the least volatile since January. The calm contrasts with the rest of the world, where investors are increasingly obsessed with the reaction of central banks to the threat of an overheating global economy. challenge for the Chinese government, “said Zhou Hao, an economist at Commerzbank AG in Singapore. More than 15 months after the pandemic forced China to cut rates and inject trillions of yuan into the financial system, policymakers Politicians in Beijing are – like many others around the world – to deal with the consequences. As the global economic recovery accelerates, some are forced to act due to inflation: Brazil in March became the first Group of 20 country to raise borrowing costs, with Turkey and Russia following suit not. Even Iceland raised a short-term rate in May. Others, like the Federal Reserve and the European Central Bank, have insisted that the price spikes are only temporary. The BPC also downplayed inflation concerns in its first quarter monetary report, released shortly after data showed factory prices jumped 6.8% in April – the fastest pace. rapid since 2017. contain the increase in producer prices because few products are priced in the country. There is not much China can do, and even a tightening of monetary policy will not be able to change the situation, ”said David Qu, Chinese economist at Bloomberg Economics. In recent days, continued gains could push companies to pass higher costs on to consumers, who are already spending less than expected. Analysts from Huachuang Securities Co. said in a May 9 report that the prices of consumer goods, such as household appliances and furniture, as well as electric vehicles and food, were rising. Yet there is little evidence of demand-induced pressures, with core inflation eliminating volatile food and energy costs, quite moderate. The threat of inflation – associated with a fragile economy – tends to be bad news for stocks because of how it erodes corporate earnings and, for bonds, it reduces the value of future cash flows. The acceleration in prices devastated the Chinese bond market in 2019 and contributed to a sharp sell-off in stocks in early 2016. Significant how seriously this threat is taken, the Chinese cabinet said on Wednesday that more effort was needed. be deployed to fight against rising commodity prices. A PBOC official said China should allow the yuan to appreciate to offset the impact of rising import prices, according to an article published on Friday. The currency is trading near an almost three-year high against the dollar. Imported inflation is a headache for Chinese leaders who already face the risks caused by a surge in capital inflows. In recent years, Beijing has opened up investment channels to allow more funds to enter its financial system. The aim was to use the weight of foreign institutions to anchor its markets and stabilize its currency, but record liquidity released by global central banks in the wake of the pandemic is now putting pressure on prices in China. The main securities regulator, Yi Huiman, said in March that the large flows of “hot money” into China must be strictly controlled. That same month, banking regulator Guo Shuqing said he was “very worried” that asset bubbles in foreign markets would soon burst, posing a risk to the global economy. Chinese policymakers must fight. For now, Beijing’s current approach of upsetting, increasing supply, and penalizing speculation appears to be targeting the former. “It is still too early to say whether China can contain the surge in producer prices and whether it will impact large-scale consumer prices,” said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group Ltd. “Much of this inflation is imported – it’s not something that can be solved by the PBOC. »More stories like Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP



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