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Chen Yulu, deputy governor of the People’s Bank of China, says the central bank must stay vigilant as it aims to “strictly prevent and control external financial risks”. Photo: Weibo

Will Joe Biden’s US$1.9 trillion ‘American Rescue Plan’ be a boon for China, or could excessive liquidity lead to financial trouble?

  • Latest US coronavirus stimulus package would put even more liquidity into global economy, and much could end up in China, where investment returns are promising
  • Analysts say US president-elect’s proposal could further boost Chinese exports, but they also warn of hot money inflows creating dangerous asset bubbles

US President-elect Joe Biden’s newly outlined US$1.9 trillion stimulus package looks to have global implications – prompting China’s central bank to call attention to growing external risks to its economy and that of the world at large.

If Biden’s plan is successful in spurring American growth, analysts say it could eventually increase already strong US demand for Chinese products. But the People’s Bank of China (PBOC) is taking a more cautious outlook.

Responding to questions about the potential impact on China of Biden’s proposed aid package, Chen Yulu, deputy governor of the PBOC, said on Friday that the central bank must stay vigilant as it aims to “strictly prevent and control external financial risks”.

And he went on to outline what he said were three main risks facing the global economy.


China GDP: economy grew by 4.9 per cent in third quarter of 2020

China GDP: economy grew by 4.9 per cent in third quarter of 2020
“One [external risk] is the departure from the fundamentals of the real economy in the international financial market, with increasing volatility. The second [risk] is that, with loose global liquidity, the direction of cross-border [capital] flows is increasingly volatile,” Chen said at a media briefing, referencing speculative “ hot money” – short-term investments in financial products that can move out of the country rapidly.

“Third, the pandemic has had an unprecedented impact on the economy, and the debt risk of low-income countries will rise further, which may further affect the progress of the global economic recovery.”

In light of these risks, Chen said, China’s policy focus “is still to adhere to the principle of domestic priority and continue to do our job”, adding that China will maintain continuity in its economic policies, improve the supervision of its financial system, and strengthen coordination with other countries through platforms such as the Group of 20.

The PBOC has expressed concerns for some time about excess liquidity in the world being created by expansive fiscal and monetary policies of developed economies leading to asset bubbles, and the subsequent risk of a financial crisis if those bubbles burst.

Capital inflows have been pouring into China to take advantage of better returns on offer in its stock and bond markets. For example, the Chinese government’s 10-year bond yielded 3.159 per cent in local trading late on Friday, well above the yield on the United States Treasury’s 10-year bond of 1.115 per cent, and on the benchmark German 10-year bond yield of minus 0.536 per cent.

In addition to Biden’s proposed additional fiscal stimulus, US Federal Reserve chairman Jerome Powell stressed on Thursday that an interest rate hike is coming “no time soon”, indicating that the US central bank is going to maintain its ultra-accommodating monetary policy, keeping interest rates at record-low levels and maintaining its bond-purchasing programme to pump more liquidity into the financial system.

Some analysts are concerned that the persistently loose US monetary policy could introduce more volatility in funds flowing into and out of China, because of speculative hot money going into yuan-denominated assets. China continues to strictly control fund flows to maintain a steady yuan exchange rate, which keeps its exports competitively priced.

China moves to curb yuan rally pressure due to hot money and export concerns

“China is still the only country that maintains a normal currency framework – that is, our interest rate is still positive – so the interest rate gap between China and foreign countries has widened,” Li Yang, chairman of the National Institution for Finance & Development (NIFD), a government-linked think tank, said this week at a seminar on China’s bond market in Beijing. “There are two outcomes: the strength of the yuan exchange rate and capital inflows.

“The pressure of fund inflows is relatively large. Therefore, [funds flowing into] the bond and stock markets would promote the internationalisation of the yuan, but further international capital flows will test our management capabilities.”

Tommy Xie, head of Greater China research at OCBC Bank in Singapore, said that China is likely to attract more fund inflows in the coming months as the country continues to open up its financial market to foreign capital.
One of the concerns of the central bank is that [Chinese] firms will start to unwind their US dollar deposits [to buy the yuan]
Tommy Xie, OCBC Bank

But he expects policymakers to be wary of strong appreciation pressure on the yuan due to Chinese companies selling off their US dollar holdings amid concerns about sharply rising US debt levels.

“So far, China can hold its ground,” Xie said. “One of the concerns of the central bank is that [Chinese] firms will start to unwind their US dollar deposits [to buy the yuan]. The expectation [for the yuan exchange rate] is very important … so that they don’t have to worry about a sudden unwinding of the US dollar deposits.”

Also at the central bank’s media briefing on Friday, Sun Guofeng, head of monetary policy at the PBOC, cautioned against the increasing volatility of the yuan going forward.

“We have noticed that a new round of fiscal stimulus in the US is ready to be introduced, and the global financial market has already responded,” Sun said. “US inflation expectations have risen, US Treasury yields have rebounded sharply, the US dollar has appreciated against other major currencies, and the yuan has also depreciated against the US dollar recently.”

Sun added that the yuan’s fluctuation has been “normal”.

The yuan appreciated 6.9 per cent against the US dollar in 2020 and 4 per cent against a trade-weighted basket of currencies, Sun said. The yuan’s rise has sparked concerns in Beijing policymaking circles that a strong inflow of funds could create asset bubbles.

Biden’s latest proposal, which he said may be followed by another, would add on to the US$900 billion economic support plan enacted in December and the more than US$3 trillion in stimulus aid passed by the Congress earlier last year, resulting in a sharp increase in the US government’s debt level.

The new proposal – dubbed the “American Rescue Plan” – includes US$415 billion to bolster America’s response to the coronavirus outbreak and to fund the roll-out of Covid-19 vaccines; US$1 trillion in direct relief to households; and roughly US$440 billion for small businesses and communities that have been hit particularly hard by the pandemic.

The US government would issue additional payments to middle-class households of US$1,400 – topping up the US$600 payments delivered by the last congressional stimulus legislation passed in December. Supplemental unemployment insurance would rise to US$400 a week from US$300 a week now, and would be extended to September.

Once the [US] consumer is able to spend, due to this relief package that Biden is proposing, there will be a bit more spending power … that would be good for China
Suan Teck Kin, United Overseas Bank

Analysts said that Biden’s pledge to vaccinate more Americans would help speed up the US economic recovery. More than 10 million Americans have received their first dose of a Covid-19 vaccine, according to the US Centres for Disease Control and Prevention.

A recovery in US economic growth and a boost in US consumption spurred by Biden’s stimulus proposal could be positive for Chinese exports, according to analysts.

China’s exports grew by 18.1 per cent in December, marking the seventh consecutive month of export growth, with China’s factories continuing to capitalise on coronavirus lockdowns in the West.

“The demand for medical equipment and personal protective equipment will continue to be there,” said Suan Teck Kin, head of research at United Overseas Bank (UOB). “Once the [US] consumer is able to spend, due to this relief package that Biden is proposing, there will be a bit more spending power … that would be good for China.”


This article appeared in the South China Morning Post print edition as: Biden’s US$1.9tr stimulus proposal prompts concernsBiden’s US$1.9tr stimulus plan prompts concerns over volatility, bubbles