Global markets are awash with liquidity, with the risk of financial “bubbles” rising as central banks continue to pour monetary stimulus into their economies in response to the COVID-19 pandemic. That has China’s authorities worried.
China is clearly concerned that, having opened some of its markets to foreign capital, the ultra-loose conditions elsewhere – which will be exacerbated if the Biden administration is able toto the $US4 trillion US pandemic response last year -- will lead to destabilising inflows of speculative capital into its own system.
The authorities were trying to address that leverage, and the inefficiency with which China’s corporate sector has deployed its capital, particularly within the state-owned sector, when the pandemic hit and they had to reverse course. Guo’s concern about liquidity and bubbles elsewhere probably relates to what has been happening to that excess liquidity churning through global markets.
Not surprisingly, in a world where investors have been prepared to take ever-increasing risks to chase yields, the returns on offer in China – the yield differentials -- are attracting capital and exposing China to the risks in other financial systems.
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