China’s financial regulators are obsessed with risk, and one of their most recent high-profile concerns is the United States.
An example from this past week is hot money. The term refers to capital that crosses national borders in hopes of making a quick profit. When the amount of hot money is large enough, such flows can be very destructive, which is why China’s top securities regulator, Yi Huiman, has begun calling for strict controls on hot money.
But why now? Li Daokui, a former member of the Chinese central bank’s monetary policy committee, explained this concern by referring to the $1.9 trillion pandemic bailout plan in the United States.
Washington’s stimulus package boosted prospects for U.S. economic growth and Inflation. That in turn has pushed up bond yields and prompted investors to sell off risky assets. This means that China could see a large outflow of hot money later this year.
Beijing has reason to worry that China is seeing large inflows of money. For example, foreign investors bought RMB 570 billion of Chinese government bonds last year, more than twice the amount purchased in 2019. A sudden reversal of this trend could be a source of significant volatility.
Of course, the U.S. stimulus has also benefited China by boosting demand for its exports, though this has not allayed concerns. Li Daokui, who is currently director of the Academic Center for China Economic Practice and Thinking at Tsinghua University, lists hot money as one of the two biggest risks facing China’s economy this year, the other being a possible wave of bond defaults.
To be clear, it is not Washington’s measures to boost the economy that Beijing opposes. It is the dominant position of the United States in the global financial system and the enormous impact of U.S. actions on the world that irritates Communist Party policymakers.
Indeed, last August, China’s top banking regulator slammed the U.S. stimulus for precisely this reason. Guo Shuqing wrote in an article for the magazine Seeking Truth that the Fed’s “unprecedented and unlimited quantitative easing” is eroding global financial stability and could push the world into another crisis.
The risk from the U.S. was a topic Guo Shuqing mentioned again earlier this month. He told reporters on March 2 that he was “very worried” about the bubble building in U.S. and European financial markets and the impact of its bursting on China.
But perhaps these protests are to be expected. After all, as China’s power and influence rise, Communist Party leaders are concerned about U.S. leadership in areas such as technology, diplomacy and trade. Nothing can make a financial difference.
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