Beijing weighs market risks of Fed ending stimulus

PUBLISHED : Monday, 02 September, 2013, 12:00am
UPDATED : Monday, 02 September, 2013, 4:28am

Researchers acting for the State Council, the central government's cabinet, are working on a report into the risks to Hong Kong and the mainland from any withdrawal of the US Federal Reserve's unconventional monetary stimulus, or quantitative easing (QE) programme.

Sources with direct knowledge of the project told the South China Morning Post that the Development Research Centre has been compiling the report as global markets have been roiled by the risk of the withdrawal of liquidity injections that the Fed has signalled could begin as early as this month if US economic conditions show enough improvement.

"The report will assess the risks to Chinese financial markets, property companies and banks. It will also look at the risks to Hong Kong markets," said one source.

The super-easy monetary policies led by the Fed, the Bank of England, the European Central Bank, the Bank of Japan and others in the wake of the 2008-09 global financial crisis have been largely responsible for a surge in the value of commodities and emerging market asset prices.

Investors have chased the prices of real and financial assets higher as risk-free interest rates at the world's major central banks have hovered close to zero.

QE policies are also widely considered to be behind the flood of so-called "hot money" into China that has driven up real estate and other asset prices, further distorting a cost of capital on the mainland that is already skewed by state-directed lending to key industries by the country's big, government-backed banks.

Beijing has sounded increasingly hawkish about the risks facing emerging markets of too rapid an unwind of the Fed's stimulus programme. Vice Finance Minister Zhu Guangyao and central bank Vice Governor Yi Gang last week both made public statements that essentially urged the Fed to consider carefully the pace and timing of its exit from super-stimulative monetary policy.

Trillions of dollars worth of investments are benchmarked against US Treasuries, yields which have hit two-year highs in recent weeks amid fears of a tapering of buying of US bonds, denting the value of a range of asset prices in the process.

The potential for a sudden withdrawal of capital from emerging markets is a particular risk for Hong Kong's globally- connected financial markets.

Meanwhile refinancing risks could soar for mainland corporates, which have been busily borrowing in dollars and other foreign currencies with interest rates at record lows. A crunch in domestic mainland credit markets in June revealed the tightness of available liquidity to the banking and corporate sectors. Any sudden surge in foreign borrowing costs could push some firms into default and trigger a domino effect, analysts say.

"I'm encouraged that the government is actively thinking about these risks," one long-time external adviser to China's monetary authorities told the Post.