American Rescue Plan: China moves to counter ‘turmoil in financial markets’ as policy divergence widens with US

Beijing and Washington are moving in opposite directions in their attempts to support their respective economies

Chinese officials and policy advisers have been highly critical of US President Joe Biden’s new US$1.9 trillion American Rescue Plan

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The People’s Bank of China is stepping up liquidity support for domestic businesses and increasing its monitoring of cross-border capital flows amid concerns over Washington’s massive new fiscal stimulus plan. Photo: Bloomberg

Published: 12:30am, 16 Mar 2021Updated: 2:40am, 16 Mar 2021

China’s central bank is stepping up liquidity support for domestic businesses and increasing its monitoring of cross-border capital flows as concerns persist over the side effects of Washington’s massive new fiscal stimulus plan.

The moves by the People’s Bank of China come amid a growing divergence in the recent economic policy responses by the United States and China, with Washington boosting stimulus significantly while Beijing starts to taper off its economic-support policies enacted last year in response to the coronavirus pandemic.

Beijing officials and policy advisers have been highly critical of US President Joe Biden’s newly signed US$1.9 trillion American Rescue Plan, warning that it could cause massive capital flows and imported inflation that could exacerbate domestic financial risks from already high debt levels.

“The [US Treasury bond] yield hike driven by inflation expectations will lead to a revaluation of asset prices, or even turmoil in financial markets. Domestic markets are unlikely to remain unresponsive,” Zhang Xiaohui, former assistant governor of the central bank, said on Thursday.

China’s A-share stock market is undergoing a correction after the widely watched yields on 10-year US Treasury notes spiked last week to a 13-month high of more than 1.6 per cent.

“Although [China’s] consumer inflation is relatively controllable, we see an obvious rise in [domestic] asset prices,” Zhang said during a lecture hosted by the Shanghai Pushan Foundation.

Liquidity management is believed to be the first priority, given the prospect of rising market volatility. “The market is very concerned about a turning point in liquidity, as the whole world has entered uncharted monetary and financial territory after the pandemic,” Zhang said.