China’s focus on bubble risks is a warning for stock 2/1


China’s focus on bubble risks

China’s focus on bubble risks is a warning for stock 2/1


For investors fretting about an end to the era of cheap and plentiful debt, China just provided another reason to worry.

The nation’s top banking regulator jolted markets on Tuesday with a warning about the need to reduce leverage amid the rising risk of bubbles globally and in the local property sector. The impact on Chinese stocks was swift: the CSI 300 index fell as much as 2.1% to lead declines in Asia, while Kweichow Moutai, the biggest contributor to gains during 2020’s stimulus cycle, tumbled almost 5%. China’s largest stock has lost more than $100 billion in nine days

Central banks around the world are facing the challenge of when and how to pare back stimulus as economies recover from the pandemic. Global bond markets plunged last week as traders pulled forward bets on interest rate increases, with the 10-year Treasury yield reaching the highest in a year.Deleveraging has particular resonance in China, where it is a key priority of President Xi Jinping due to the size of the nation’s debt mountain. A crackdown on leverage in 2017 sent corporate and government bond yields to multiyear highs before officials halted the drive a year later amid the intensifying trade war with the United States.

Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Party secretary of the central bank, did not mince his words.

“From a banking and insurance industry’s perspective, the first step is to reduce the high leverage within the financial system,” Guo said at a briefing in Beijing. Speculation in the property market is “very dangerous” and bubbles in U.S. and European financial markets may soon burst, he said.”His talk shows a willingness to tolerate higher rates,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management in Hong Kong. “This is a confirmation of monetary-policy stance tightening. That’s important.”

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