American Rescue Plan: China faces foreign outflows threat, with instability fuelled by US$1.9 trillion coronavirus relief
- Potential for a reversal in capital inflows and a wave of bond defaults are two big risks facing China’s economy this year, says former central bank adviser
- The instability is being fuelled by the US$1.9 trillion American Rescue Plan, which will benefit China by boosting exports, but also add to risks
China faces the threat of foreign outflows from the second half of the year as rising borrowing costs in the United States drives investors out of emerging markets, according to a former adviser to China’s central bank.
The potential for a reversal in capital inflows and a possible wave of bond defaults are two of the biggest risks facing the economy this year, Li Daokui, a former member of the People’s Bank of China’s monetary policy committee, said in an interview.
“It’s just like drinking alcohol: you feel comfortable, but people worry about the after-effect,” he said. “When the stimulus is gone and the US is back to normal, the aftermath will be very damaging to emerging market economies.”
A lot of investors are moving out of emerging market economies. China has emerging market characteristics, even though for the time being it is perceived as a stable market
The US stimulus is boosting the outlook for growth and inflation, driving up bond yields and prompting investors to sell riskier, emerging market assets. That is a worry for global policymakers as they brace for more volatility in their currencies and financial markets.
