China’s battle to keep order in financial markets is getting harder and harder as money flows into everything from commodities to housing and stocks.
In May alone, the government vowed to fight speculation in metals, revived the idea of a property tax, oversaw mortgage rate hikes in some cities, banned cryptocurrency mining and played down calls. within the central bank for a stronger yuan.
The authorities are focusing on the risks of overheating assets, as they maintain a relatively loose monetary policy to support the economic recovery after the pandemic. Targeted intervention is likely to weigh on the pockets of Chinese financial markets as the Communist Party seeks to avoid volatility as the centenary of its founding approaches on July 1.
“The political trend is now focused on financial stability,” said Alex Wolf, Asia Investment Strategy Manager at JPMorgan Private Bank. “Beijing will want to address bubble risks from the start, in a targeted manner, using strong rhetoric and small policy tweaks. This seems to be sufficient for the time being.
Much of the world faces inflationary pressures as rebounding economies boost demand for goods. Central bankers in the United States and Europe are making it clear that they view the rise in consumer prices as temporary and that extremely low interest rates will remain in place for the foreseeable future.
The Chinese bond market is not pricing higher borrowing costs any time soon. The yield on 10-year sovereign debt fell to a nearly nine-month low. But at around 3.1%, that’s a decent return for global investors, and the resulting inflows add to the vast pool of domestic funds trapped by capital controls. So-called hot money drives up asset prices more and more.
Beijing is having some success with its targeted approach: commodity futures have fallen from their record highs in recent weeks and digital currencies have collapsed. Bitcoin is down about 30% this month in a rout partly sparked by Elon Musk’s thoughts on the environmental costs of digital assets.
Like whack-a-mole, however, crackdowns in parts of China’s financial markets are leading to an increase in other assets. The CSI 300 stock index jumped more than 3% on Tuesday, helped by record flows through the Hong Kong trade channel and the unprecedented purchase of China’s second-largest exchange-traded fund. This reinforces the appeal of the yuan, which has been at its strongest against the dollar for nearly three years.