Why the PBOC is keeping an eye on asset price inflation in China

A warning of the risk of asset bubbles and Beijing’s recent net liquidity withdrawal are signals to the market that, while the authorities won’t make a sudden U-turn on pledged policy support, they also won’t tolerate unchecked credit growth

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Residential buildings in Beijing are seen on January 31. China’s debt has soared amid the pandemic, with the latest data showing a debt surge in all sectors, including non-financial corporations, households and government. Photo: Reuters

Published: 4:45pm, 2 Feb 2021Updated: 5:30pm, 2 Feb 2021

As a distinguished scholar and adviser to the People’s Bank of China, Ma Jun’s comments on the Chinese economy and monetary policy are usually very eye-catching. His recent speech has caught the attention of the market, even rattled it. The question is whether China has entered a new tightening cycle.

For the time being, the market still expects a gradual policy normalisation in the coming year, as the Chinese authorities have said there would be “no sudden turns” in overall policy at the Central Economic Work Conference in December.

Given the coronavirus pandemic and geopolitical uncertainties, it makes sense to maintain a generally supportive policy to help the economy navigate the headwinds. In fact, the most recent statements from PBOC governor Yi Gang, which he made on a panel hosted by the World Economic Forum, suggest authorities will continue to use monetary policy to prop up the economy. He said China won’t “prematurely” end its supportive policy measures but will keep debt risks under control.

Compared to Yi’s moderate statements, Dr Ma sounded more hawkish as he warned of the risk of asset bubbles, including in the equity and property markets, due to aggressive monetary easing amid the pandemic. As a result, he is concerned that financial risks would further accumulate if there is no appropriate policy adjustment in the coming year.

Moreover, Ma suggested that China should scrap the annual gross domestic product growth target permanently, to shift the focus to employment and other economic indicators. The financial media recently reported that Beijing is seriously considering dropping the growth target again this year to prevent local governments from borrowing massively from commercial banks.

Taking the comments from Yi and Ma as a whole, while there exists some contradiction, the policy tone is clear. Beijing needs healthy economic growth, which requires proper risk controls to ensure financial stability.