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.
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.