Large capital inflows into China's equity and bond markets may continue this year due to the differential interest rates in the domestic and international markets. This may prompt the People's Bank of China, the central bank, to sustain financial stability through cautious measures, experts said on Tuesday.
With more foreign capital flowing into the onshore market, the yuan will face appreciation pressure, especially when global investors start seeking safe havens as the US dollar weakens and foreign central banks further ease monetary conditions, they said.
Unlike other major economies, China still has enough room to lower interest rates, but monetary authorities should use the policy space rationally, said Li Yang, chairman of the National Institution for Finance and Development, a think tank under the Chinese Academy of Social Sciences.
"We should be aware of the challenges from the long-term low and negative interest rates in some developed economies," Li said during the China Bond Market Forum, adding that domestic regulators should take cautious steps to monitor cross-border capital flows and push forward structural reforms in the financial sector.
Given the recent surge in new COVID-19 cases, experts said, concerns are rising about the downside risks to the near-term global economic outlook.
Richard Clarida, vice-chairman of the US Federal Reserve, said on Friday that the Fed would use the full range of tools to support the US economy and ensure that the recovery is as robust as possible. The Fed's monetary measures include maintaining the near-zero level for the federal funds rate until the US has achieved the maximum employment assessed by the Fed and until inflation is on track to moderately exceed 2 percent for some time.
Zhu Min, a former deputy managing director of the International Monetary Fund and head of Tsinghua University's National Institute of Financial Research, said that accommodative monetary policies will continue across the world to hedge against the rising uncertainties. The global equity market is expected to be more vulnerable, while yields in the bond market may further decline, he said.
The State Administration of Foreign Exchange, China's foreign exchange regulator, said in a statement after its annual meeting last week that it would keep a close watch on external shocks and strengthen its monitoring of the forex market to prevent any abnormal risks from cross-border capital flows.
Financial stability issues are already on the PBOC radar, said experts. There are several important tools that Chinese policymakers can use under the macro-prudential policy framework to tackle the financial stability issues, they said.
The PBOC and SAFE last week decided to lower the macro-prudential adjustment parameter for cross-border financing of companies to 1 from 1.25, a measure that allows companies to invest more overseas and balance the cross-border capital flows.
In the coming years, China is likely to maintain a relatively higher interest rate level compared with other major economies, said Ding Shuang, a chief economist at Standard Chartered Bank. Global major central banks may maintain zero-level interest rates until 2022, and the yield of 10-year Treasury bonds in China has been 230 basis points higher than that of the 10-year US Treasurys, he said.