China’s strict capital controls may be eased to allow investment abroad as bubble risks grow
- Excess financial liquidity combined with China’s strict capital controls could turn out to be a toxic concoction for the economy, analysts say
- As such, authorities may be considering loosening rules on overseas investment to ease pressure on the yuan and the country’s exporters
Chinese authorities may finally feel the time is right for a new wave of financial opening to allow citizens to invest savings abroad, as pressure mounts from a tidal wave of liquidity resulting from aggressive stimulus policies in developed economies.
Investment is flooding into China thanks to its strong economic rebound from the coronavirus pandemic, while global demand for medical protection gear and electronic devices has boosted export earnings. Improved returns from China’s stock and bond markets have also resulted in strong portfolio investment inflows.
But the ample financial liquidity combined with China’s draconian capital controls could turn out to be a toxic concoction for the country.
Without a release valve, the mixture could push domestic stock and property prices far beyond levels justified by economic fundamentals and fuel credit-based investment booms, despite low returns.
Excess liquidity with better domestic activity has already led to some price inflation in the housing sector, which has implications for social stability and inequality
Capital outflows started to grow in the second half of last year as the government sought to take appreciation pressure off the yuan exchange rate.