Former PBoC official: Monetary tightening may burst China’s economic bubble

Signs that the Communist Party’s central bank (PBOC) will tighten liquidity this year are being closely watched by investors. In January, a senior bank official called on the market to tighten money to curb real estate and stock market bubbles. In response, a former PBoC official warned that tightening monetary policy would not effectively prevent asset bubbles, but would burst them and China would risk “huge economic losses.

Bloomberg reported on March 17 that Sheng Songcheng, former director of the central bank’s survey and statistics department, said stricter market regulation would be better than tighter policies to reduce speculation in financial assets.

Sheng is now a professor at China Europe International Business School in Shanghai.

Responding to a written question from Bloomberg, Sheng Songcheng said, “Tightening monetary policy cannot effectively prevent asset bubbles, but it will burst them and bring huge economic losses.”

He said monetary policy should not be tightened in the short term, in part because China’s investment and consumption growth rates have not fully recovered from the Communist Party virus pandemic.

Sheng believes that while other major economies have used loose monetary policy to restore growth, a tightening of monetary policy in China would lead to an influx of speculative capital, which would push up the yuan’s exchange rate, weaken the competitiveness of exporters and could also lead to a surge in imports, introducing Inflation and asset bubbles.

Bloomberg reported that Sheng Songcheng’s views diverged from those of other Communist Party officials, fueling debate about the turmoil in China’s financial markets this year.

In January, Ma Jun, a member of the Communist Party’s central bank’s monetary committee, said in a speech at a wealth management forum that the risk of asset bubbles would increase if the central bank did not adjust its policy, calling for tightening the currency to curb real estate and stock market bubbles.

On March 2, the chairman of the Communist Party’s Banking and Insurance Regulatory Commission warned at an official Communist Party press conference about the risk of a global bubble, saying he was worried about the day when financial markets, especially foreign financial asset bubbles, would burst. Investors interpreted this as a signal to tighten monetary policy and future interest rate hikes.

Fangjian Fu, an associate professor at Singapore Management University’s Lee Kong Chian School of Business, said Guo Shuqing’s reference to the risk of a financial asset bubble was a hint that the new U.S. administration’s massive stimulus package would eventually lead to increased inflation and a devaluation of the dollar, with China also being affected.

U.S. President Joe Biden recently signed a $1.9 trillion bailout package, which Communist Party policy advisers believe could lead to massive capital flows and imported inflation, which would raise China’s already high debt levels and exacerbate China’s financial risks.

According to Fu Fangjian, the inflationary pressure from the U.S. flooding will eventually be transmitted to the world, and more “hot money” may flow into China; if the volume is too large, it may bring systemic financial risks.

Zhang Xiaohui, a former assistant governor of China’s central bank, said, “The rise in yields (of U.S. Treasuries) driven by inflationary expectations will lead to asset price revaluation and even financial market turmoil, and the domestic market is unlikely to remain indifferent.”

Zhang added, “The market is very worried about an inflection point in liquidity as the world enters uncharted monetary and financial territory in the wake of the Epidemic.”

Hong Kong‘s South China Morning Post reported on March 16 that Beijing is proceeding cautiously, cutting back on stimulus measures and focusing on controlling financial risks.