A leading Chinese economist has imputed the recent volatility in China’s financial markets to asset price inflation, and called for keeping monetary policy on an even keel.
Zhang Xiaohui (张晓慧), head of the Tsinghua People’s Bank of China School of Finance (PBCSF), said that while the risk of inflation in the real economy was “comparatively under control,” capital market inflation remained “quite pronounced.”
“The rise in asset prices is still quite salient, and this situation could be a reason for the extremely sensitive behaviour of financial markets at present,” said Zhang on 11 March at the 23rd Pushan Forum.
“The market is paying extremely close attention to whether liquidity has reached a turning point, and this is because the world has entered an unknown monetary and financial environment after the [COVID-19] pandemic.”
Zhang said that monetary policy should keep market liquidity “basically stable,” and the central bank should continue to increase its “expectation management capability” in order to raise the effectiveness of monetary policy adjustments.
“Interest rate rises brought about by expectations of inflation could lead to the revaluation of asset prices, and create ‘the illusion of wealth’ and the ‘illusion of ability’ amongst market actors, or even cause major volatility on financial markets.”