MNI POLICY: China Faces Risks from External Easing: Think Tank

China must keep its financial markets steady in the next five years as it accelerates the opening up of its economy, and manages the spillover effects of external easing and pandemic-hit global economy, said the China Finance 40 Forum, a government-endorsed think tank.

China's monetary policy must balance supporting the recovery while preventing asset bubbles due to an external environment of easing and low interest rates, said Lu Lei, a member of CF40 and the deputy head of the State Administration of Foreign Exchange. Lu made the comment at a forum releasing the Jingshan Report on Sunday, the theme of which was China's 14th Five-Year Plan.

Developing economies should be on guard against risks of spillover effects from excess liquidity created by advanced economies including the U.S., Lu said.

--DEGLOBALIZATION

Deglobalization will make it more difficult for Chinese companies in obtaining financing in the U.S., while politics may force foreign companies to leave China, Lu said.

Chinese banks' interest margins are narrowing as rates on loans fall faster than on deposits, Lu said. Current margins of lenders dropped to 2.35% from 3%, he said.

Given the adversities, China should push forward opening up, including the crucial yuan internationalization and a sophisticated cross-border capital management system, Lu said.

It should form a market-based exchange rate formation system and capital account convertibility when the yuan appreciates and capital flows in, he said.

In the same report, Wang Xin, a member of CF40 and head of the PBOC Research Bureau, warned that the financial sector may be increasingly exposed to risks as the epidemic persists, including weaknesses of small and medium-sized financial institutions, indebted local governments, an overheating property market, he said.