Central bank of China warns of market bubbles
Today, Chinese stocks are under strong selling pressure from the People's Bank of China (PBoC). The Chinese regulator was the first official entity to express its concerns about above-average liquidity in the interbank system, which could inflate the prices of certain asset classes. At the same time, a number of other leading investors are also suspending the current valuation.
PBoc lowers liquidity
However, it was not just a warning or an expression of concern by the Chinese central bank. In particular, investors commented on the fact that the PBoC withdrew $ 12 billion in liquidity through open market operations. It is a process where the central bank and commercial banks borrow money from each other. Following this, the repo rate rose to 2.8%, the highest since the end of 2019. The Hong Kong Hang Seng Index, which rose sharply this month due to a huge increase in volumes, fell by more than 2%. The Shanghai index also fell by about 2%.
Investors around the world are closely following the PBoC approach, which was primarily intended to act as insurance against a slump in economic activity and asset prices. However, the Shanghai index rose to its new record highs this month, putting the central bank under pressure to tighten financial conditions. However, the bank is still plagued by slowly rising inflation, despite renewed economic growth. Therefore, it cannot afford to tighten the monetary policy screws so much.
PBoc will have to further adjust the its policy
However, central bank adviser Ma Jun warned this week that the risk of a bubble on some assets will continue to grow if the bank does not adjust its policy. According to him, the bank will have to adjust its policy multiple times by the end of the year in order to prevent the risk from growing further. This could lead to greater economic and financial problems. The bank started with restrictions on short-term liquidity at the end of last year, when interbank rates rose to two-year highs. After that, however, they began to slowly decline again.
Chinese regulators have already begun to curb rising real estate prices. They have limited the amount that banks can provide to the sector and launched instruments that limit price growth. Nevertheless, according to investors, the mood in the markets remains largely positive, as evidenced by previous sessions, which in some cases were even euphoric. Rising borrowing costs should not be a big problem for markets in the long run, as yields are still low in most countries and investing in the US dollar now makes no sense as risks continue to decline.