China assesses possible global risks associated with Biden’s “America’s Salvation Plan”
US President-elect Joe Biden unveils a proposal for a $ 1.9 trillion stimulus package that is likely to have global implications, prompting China’s central bank to pay attention to growing external risks to its economy and the global economy as a whole..
According to analysts, if the plan Joe Biden will lead to success in stimulating economic growth in America, this could ultimately increase the already strong US demand for Chinese products.
But the People’s Bank of China (PBOC) is taking a more cautious stance.
Answering questions about the potential impact on China of Biden’s proposed aid package, Chen Yulu (Chen Yulu), deputy chairman of the NBK, said Friday the central bank must remain vigilant as it seeks «strictly prevent external financial risks and control them».
He further outlined, according to him, the three main risks facing the world economy.
«One [external risk] is a departure from the basic principles of the real economy in the international financial market with increasing volatility. The second [risk] is that in the context of low global liquidity, the direction of cross-border [capital] flows is becoming increasingly unstable.», – said Chen Yulu at a media briefing, referring to speculative «hot money» – short-term investments in financial products that can quickly leave the country.
«Third, the pandemic has had an unprecedented impact on the economy, and the debt risk of low-income countries will rise, which could further affect the progress of the global economic recovery.».
In light of these risks, Chen said, China’s political focus «is still about sticking to the principle of inner priority and keep doing your job», adding that China will maintain the continuity of its economic policies, improve oversight of its financial system, and strengthen coordination with other countries through organizations such as the G-20.
For some time, the NBK has expressed concern about excess global liquidity created by the expansive fiscal and monetary policies of developed countries, leading to bubbles in various asset classes, and the consequent risk of a financial crisis if these bubbles burst..
Capital flows have poured into China to take advantage of the higher yields in its stock and bond markets. For example, the yield on China’s 10-year government bonds in local trading late Friday night was 3.159%, well above the 1.115% yield on 10-year US Treasury bonds and the yield on 10-year US Treasury bonds. benchmark German bonds, accounting for -0.536%.
In addition to Biden’s proposed additional fiscal stimulus, the Chairman of the United States Federal Reserve Jerome Powell stressed on Thursday that an increase in interest rates will occur «not soon», indicating that the US central bank (Fed) will maintain its highly flexible monetary policy, keeping interest rates at record lows and supporting bond buying programs to increase the liquidity of the financial system.
Some analysts are concerned that prolonged loose US monetary policy could lead to greater volatility in funds flowing into both China and China, due to speculative hot money flowing into yuan-denominated assets. China continues to strictly control the flow of funds to maintain a stable RMB exchange rate, thus keeping export prices competitive.
«China is still the only country that maintains a normal exchange rate framework, meaning our interest rate remains positive, so the interest rate gap between China and overseas has widened.», – stated this week at the China bond market seminar in Beijing Li Yang (Li Yang), Chairman of the National Institute of Finance and Development (NIFD), a think tank with close ties to government. «There are two results: strong RMB exchange rate and capital inflows».
«The influx pressure is relatively high. Consequently, [inflows] to the bond and equity markets will contribute to the internationalization of the RMB, but further international capital flows will test our managerial abilities.».
Tommy Ce (Tommy Xie), Head of Greater China Research at OCBC Bank in Singapore, said China is likely to raise more funding in the coming months as the country continues to open its financial market to foreign capital.
But he expects policymakers to fear strong pressure on the yuan as Chinese companies sell off their dollar holdings amid fears of soaring US debt levels..
«As long as China can hold its ground», – Xie said. «The central bank is concerned that [Chinese] companies will start spinning their dollar deposits [to buy the yuan]. The wait [for the RMB exchange rate] is very important … so they don’t have to worry about the sudden cancellation of USD deposits».
Also at a central bank media briefing on Friday Sun Guofeng (Sun Guofeng), head of monetary policy at the NBK, warns against rising yuan volatility in the future.
«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.», – said Sun. «US inflation expectations have risen, US Treasury yields have risen sharply, the US dollar has appreciated against other major currencies, and the yuan has in turn depreciated against the US dollar recently.».
Sun added that the fluctuations in the yuan were «normal».
According to Sun Guofeng, the yuan appreciated 6.9% against the US dollar in 2020 and 4% against a trade-weighted basket of currencies. RMB appreciation sparks fears in Beijing political circles that strong inflows could create asset bubbles.
Biden’s latest proposal will add funds to the $ 900 billion economic support plan passed in December and the more than $ 3 trillion stimulus bailout passed by Congress earlier last year, which will sharply increase the level of US government debt..
A new proposal that has been named «American Rescue Plan», includes $ 415 billion to support America’s response to the coronavirus outbreak and to fund the deployment of the Covid-19 vaccine, $ 1 trillion in direct aid to households, and an estimated $ 440 billion for small businesses and communities hit particularly hard by the pandemic.
The US government will make additional payments to households in the amount of $ 1,400 – in addition to the $ 600 payments made in the latest congressional incentive legislation passed in December. Supplementary unemployment insurance will rise to $ 400 per week from $ 300 per week and will be extended until September this year.
Analysts say Biden’s pledge to vaccinate more Americans will help accelerate the US economic recovery. More than 10 million Americans have received their first dose of Covid-19 vaccine, according to the US Centers for Disease Control and Prevention (CDC)..
Analysts say a rebound in US economic growth and an increase in US consumption fueled by Biden’s stimulus proposal could be positive for Chinese exports..
China’s exports jumped 18.1% in December, marking the seventh straight month of export growth, with Chinese factories continuing to benefit from the coronavirus lockdown in the West.
«The demand for medical equipment and personal protective equipment will continue», – said Suan Tek Keene (Suan Teck Kin), Head of Research, United Overseas Bank (UOB). «Once the [US] consumer is able to spend, thanks to the aid package that Biden is offering, his purchasing power will be slightly higher.… it will be good for China».