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Tougher international oversight is difficult given the ongoing ultra-loose monetary policy of the major central banks. Photo: Shutterstock
Opinion
Editorial
by SCMP Editorial
Editorial
by SCMP Editorial

Global action needed to rein in inflation

  • Loose monetary policy around the world has fuelled flows of hot money, a danger that China, at least, is trying to address
SCMP Editorial
SCMP Editorial
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China’s financial regulators have called for global action to slow down the flows of hot money fuelled by loose monetary policy and huge government spending during the Covid-19 pandemic. That is a wise call, likely to have come up in the phone conversation between Vice-Premier Liu He and US Treasury Secretary Janet Yellen yesterday. But it will likely fall on deaf ears. Tougher international oversight is difficult given the ongoing ultra-loose monetary policy of the major central banks, especially the US Federal Reserve. Now, President Joe Biden is ready to spend US$5.7 trillion next year to simulate the domestic economy. A significant chunk will leak to foreign markets, and especially China; hence the warning about hot money at the International Finance Forum in Beijing.

The China Banking and Insurance Regulatory Commission said asset bubbles, from stocks to real estate, were showing froth and may be vulnerable to correction. That can be destabilising for China and other emerging markets. Global recovery is uneven as interest rates begin to diverge. Some emerging economies are lifting rates.

Could the unexpected surge in US inflation pose a risk for China?

But as developed economies recover and inflation returns, the US Fed may have to switch quickly towards tighter monetary policy, leading to a quick reversal in the direction of hot money flows. Inflation rose last month in Germany, Europe’s biggest economy, and across the euro zone, past the 2 per cent target set by the European Central Bank. A key US inflation measure, the core personal consumption expenditure index, posted the biggest year-on-year jump since the 1990s in April.

It is clear that Beijing is nervous about record hot capital flows fuelling domestic asset bubbles and inflation. Last month, it introduced a controversial property tax to curb speculation in major cities. Speculative activities involving cyber currencies such as bitcoin have also been targeted. Like global equities, China’s stock markets put up a strong performance last year that partly reflected its economic recovery. However, the lacklustre results of the Shanghai Composite Index this year also show that mainland authorities are pursuing a sensible policy to keep a lid on inflation and liquidity.

China needs to maintain healthy economic growth, and is putting in the right policies. But outside factors are beyond its control.

This article appeared in the South China Morning Post print edition as: Global action needed to rein in inflation
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