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Sounding alarm about new round of excessive liquidity in China
By Sun Lijian |
January 4, 2010, Monday
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Print Edition
Print Edition
THE global financial tsunami triggered by the United States has entered the crucial third phase - a gradual global market restoration.
The first phase of the financial crisis, beginning in March 2007, was characterized by a debt crisis - bankruptcies of sub-prime mortgage lending institutions.
Its second phase, beginning in August 2008, was characterized by a liquidity crisis as a result of the widespread global credit market meltdown and capital repatriations on a large-scale.
Comparatively speaking, the situation in the third phase is much improved.
In spite of this, there are new missions that countries, especially developed ones, must undertake and fulfill to prevent any possible deterioration of the situation.
Superfluous capital
One: Beware of excessive liquidity.
Government stimulus measures during the second phase of the crisis have largely relieved the public's panic over the global market.
However, as the market recovers, that capital is gradually becoming superfluous.
If the restoration of the substantial economy is not quick enough to assimilate the capital, the excessive liquidity, with its scale ever increasing in banks' credit creation activities, would probably flow into global speculative markets - bulk commodity markets, stock markets or overseas fragile capital markets - seeking capital gains realized in fictitious prosperity.
Such fictitious prosperity may again push up inflation and cause unnecessary bubbles, which may give rise to a new round of global financial turmoil. In this sense, withdrawing excessive liquidity is an essential step in the last phase of recovery from the financial tsunami.
Two: Reestablish and restore globalization.
Ever since the 1990s, the world's economy has been developing on the basis of economic globalization, from which both developed and developing countries have drawn great economic and social benefits.
Denying globalization today equates to denying the world's past two decades' economic and social development.
Yet, the crisis has taught everyone a lesson that in a globalized world, any irresponsible behavior of any individual or group may involve innocent people in great disasters.
Therefore, it will be a great challenge for countries to work out a way to control the risks of globalization by both strengthening self-discipline and optimizing global supervision mechanisms.
It is worth noting that the US Federal Reserve recently proposed a program to sell interest-bearing term deposits to banks, a move the US central bank would make when it decides to drain some of the liquidity it pumped into the economy during the financial crisis.
The new facility is intended to help ensure that the Fed can implement an exit strategy before a banking system awash with Fed money triggers inflation.
That the US didn't adopt the traditional policy of increasing interest rates is because it has realized the fragility of the restoration of the substantial economy and the substantial economy's limited ability in settling debts.
This serves a good example for China. In China, the alarm about a new round of excessive liquidity should be even louder.
On one hand, banks are issuing loans excessively with the encouragement of local governments. On the other hand, there are risks that the immature financial market in China is being exploited by speculators.
Both contribute to the creation of excessive liquidity. This is especially so with the real estate market.
If this trend goes on, once the bubble bursts, not only will the stability of China's financial system be shaken but the healthy development of the whole economy will also be in great danger.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.The views are his own.)
The first phase of the financial crisis, beginning in March 2007, was characterized by a debt crisis - bankruptcies of sub-prime mortgage lending institutions.
Its second phase, beginning in August 2008, was characterized by a liquidity crisis as a result of the widespread global credit market meltdown and capital repatriations on a large-scale.
Comparatively speaking, the situation in the third phase is much improved.
In spite of this, there are new missions that countries, especially developed ones, must undertake and fulfill to prevent any possible deterioration of the situation.
Superfluous capital
One: Beware of excessive liquidity.
Government stimulus measures during the second phase of the crisis have largely relieved the public's panic over the global market.
However, as the market recovers, that capital is gradually becoming superfluous.
If the restoration of the substantial economy is not quick enough to assimilate the capital, the excessive liquidity, with its scale ever increasing in banks' credit creation activities, would probably flow into global speculative markets - bulk commodity markets, stock markets or overseas fragile capital markets - seeking capital gains realized in fictitious prosperity.
Such fictitious prosperity may again push up inflation and cause unnecessary bubbles, which may give rise to a new round of global financial turmoil. In this sense, withdrawing excessive liquidity is an essential step in the last phase of recovery from the financial tsunami.
Two: Reestablish and restore globalization.
Ever since the 1990s, the world's economy has been developing on the basis of economic globalization, from which both developed and developing countries have drawn great economic and social benefits.
Denying globalization today equates to denying the world's past two decades' economic and social development.
Yet, the crisis has taught everyone a lesson that in a globalized world, any irresponsible behavior of any individual or group may involve innocent people in great disasters.
Therefore, it will be a great challenge for countries to work out a way to control the risks of globalization by both strengthening self-discipline and optimizing global supervision mechanisms.
It is worth noting that the US Federal Reserve recently proposed a program to sell interest-bearing term deposits to banks, a move the US central bank would make when it decides to drain some of the liquidity it pumped into the economy during the financial crisis.
The new facility is intended to help ensure that the Fed can implement an exit strategy before a banking system awash with Fed money triggers inflation.
That the US didn't adopt the traditional policy of increasing interest rates is because it has realized the fragility of the restoration of the substantial economy and the substantial economy's limited ability in settling debts.
This serves a good example for China. In China, the alarm about a new round of excessive liquidity should be even louder.
On one hand, banks are issuing loans excessively with the encouragement of local governments. On the other hand, there are risks that the immature financial market in China is being exploited by speculators.
Both contribute to the creation of excessive liquidity. This is especially so with the real estate market.
If this trend goes on, once the bubble bursts, not only will the stability of China's financial system be shaken but the healthy development of the whole economy will also be in great danger.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.The views are his own.)
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