China’s top bank regulator warns of ‘bubble risks’ in foreign markets

China’s top banking regulator has warned of the risk of bubbles in international markets and within the country’s own real estate sector, in the latest sign of mounting concerns over elevated global asset prices.

Financial markets in Europe and the US are out of sync with their economies and fuelled by monetary and fiscal policy, Guo Shuqing, chairman of the country’s banking and insurance regulatory commission, said on Tuesday in comments that pointed to a potential spillover into China’s financial system.

“I’m worried the bubble problem in foreign financial markets will one day pop,” he said. “China’s market is now highly linked to foreign markets and foreign capital continues to flow in.” 

The stark warning followed large inflows into China on the back of its rapid recovery from the pandemic, and as authorities in Beijing sought to liberalise overseas access to the country’s tightly controlled financial system.

In 2020, foreign direct investment in China was $163bn, surpassing flows into every other country in the world. Investors piled around Rmb1tn ($155bn) into the country’s capital markets via investment schemes in Hong Kong.

Guo, who is also a party secretary of the central bank, said that the “scale and speed” of inflows was manageable and added that on the one hand, cross-border flows should be encouraged, but on the other, causing volatility in the domestic market should be avoided.

His comments, which sent equity prices lower across Asia on Tuesday, boosted expectations of monetary tightening in China. The CSI 300 index of the country’s biggest Shanghai- and Shenzhen-listed stocks reached its highest level in February, surpassing its previous peak in the summer of 2007 in the early stages of the global financial crisis.

Guo’s statements also came weeks after Ma Jun, an adviser to the People’s Bank of China, said the risk of “bubbles” would increase if the central bank did not adjust its policy. Important rates in China were cut last year in response to the coronavirus crisis, but policymakers have grappled with low inflation despite economic growth surpassing its pre-pandemic rate at the end of last year.

Beijing has moved to control rapid price increases in its property sector, introducing measures that aim to constrain debt across its biggest real estate developers. China Fortune Land Development, an industrial park developer, defaulted on a $530m bond over the weekend.

“The core problem in the real estate sector is still relatively large bubbles,” said Guo on Tuesday. He added that many people were buying houses as speculative assets rather than to live in, but said that real estate loan growth had been slower than various other types of lending last year.

China’s debt-to-GDP ratio rose 24 percentage points in 2020 to 270 per cent, its fastest increase since the 2008 global financial crisis, according to HSBC.

Qu Hongbin, chief China economist at HSBC, said that policymakers in China will “naturally pay more attention to the debt risks” now that the recovery was well on track, but added that “concerns about rising debt levels forcing Beijing to tighten fiscal and monetary policy are overblown”.

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