Top China banker warns on asset bubbles

Some China top bankers said China needs an “urgent” tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles.
Monetary policy must not neglect asset-price movements. Therefore it is urgent that China shifts from a loose monetary policy stance to a neutral one.

China’s stimulus measures could amount to 15-17 per cent of GDP this year if government-induced bank lending is taken into account – by far the largest among major economies. With China’s economy growth reached 8.9% in the third-quarter, it increases pressure on the stimulus end.

The Chinese government has used its control over the banks to engineer a massive increase in lending this year, with new loans in the first nine months of the year 149 per cent higher than last year at Rmb8,650bn ($1,260bn). Much of this investment has gone into infrastructure projects. The M2 measure of money supply is up 29.3 per cent, year on year.

The giant investment program has polarized critics, with some predicting inflation and warning that excessive bank loans were causing sharp rises in share and property prices, while others have argued the lending binge would exacerbate over-capacity and encourage deflation.

The State Council, China’s cabinet, gave its first clear hint before the publication of third-quarter GDP figure that it was considering a tighter monetary policy when it said that policy should focus both on managing inflationary expectations as well as securing stable growth – the first time it has mentioned inflation since the global economic crisis hit China last year.

Usually this is the first thing you would expect the authorities to say before they begin to moderate policy. But the timing of any increase in interest rate is hard to predict.

Bernanke warns on imbalance risks

Ben Bernanke said it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs.

He warned that global imbalances – the big gaps between national saving, consumption and investment rates reflected in large trade deficits and surpluses – had helped cause the crisis and needed to be corrected.

For the US, he said the US must establish a sustainable fiscal trajectory anchored by a clear commitment to substantially reduce federal deficits over time. He said the US faced a “difficult fiscal situation” but insisted that US policymakers “recognize that we need to develop a fiscal exit strategy” that would put the US on a sustainable long-term fiscal path.

Mr Bernanke also urged Asian nations not to slip back into export-led growth and called on them to build up domestic consumption instead.

He said that Asia, which is leading the rebound, risked seeing asset bubbles fuelled by capital inflows. He said one way to mitigate this risk would be through some greater exchange rate flexibility offset by fiscal consolidation.

The fact is that the US current account deficit has declined from 6 per cent of gross domestic product before the crisis to about 3 per cent, but could increase again as the recovery builds.

Many Asian economies had learnt a “problematic” lesson from the 1997 Asian crisis that it was desirable to rely on export-led growth while building up large amounts of reserves to insure against a sudden reversal in capital flows.

But reserve accumulation may be as a “by-product” of growth strategies rather than the reason for which economies ran trade surpluses. Mr Bernanke suggested that if growth in emerging nations could shift towards domestic demand the reserve issue would not be as great a problem.

Brazil sets 2% tax on capital inflows

Brazil has imposed a 2 per cent tax effective from October 20 on money entering the country to invest in equities and fixed income instruments. Direct investment in the productive economy will not be affected.

The move, announced shortly before local markets closed on Monday evening, is designed to slow the appreciation of Brazil’s currency, the real, which has gained 36 per cent against the US dollar this year.

Before that, the government had denied repeatedly over the past few months that it would impose capital controls, but the idea of taxing foreign portfolio flows has been floated in recent days, apparently to gauge market reaction.

This policy decision is in contrast with the government’s official stance throughout the real’s recent appreciation period, and could represent a threat to the solid reputation of predictability and accountability earned by public institutions over the past few years, in other words, the move could undermine the government’s credibility.

Portfolio inflows have been particularly strong since Brazil emerged from a short recession in the second quarter, apparently shrugging off the impact of the global crisis. Economic growth is expected to be slightly positive this year and to reach 5 per cent or more in 2010.

Pressure has grown in recent months for the government to take measures to counter the real’s appreciation, especially from some business and trades union leaders, as the strength of the real has put a steady drain on the competitiveness of Brazilian exports. Thus, on the other hand, the measure could also boost the administration’s political clout.

As the same situation happens in China, it is a new example that how the government could cool the entrance of “hot money”.