Feeling the pressure of the U.S. second round of quantitative easing, the Chinese market is again plagued by excess liquidity. Consumer prices are running high and property prices have exceeded pre-crisis levels. But the situation is far from hopeless, as Zhang Monan, a researcher at the State Information Center, pointed out three ways to contain the liquidity in an article on The Beijing News. Edited excerpts follow:
Rampant liquidity is staging a comeback, facilitated by the central bank's massive cash injection and the large scale of greenbacks being printed by the United States.
Faced with these sweeping issues, we must ask ourselves the following questions.
The first question is how we should view this excess liquidity. Excess liquidity means the amount of capital in production, investment and consumption is much smaller than the amount of money in the virtual economy, like the financial market and financial institutions.
Second, we have to ask ourselves how much liquidity we actually have in China? Statistics show China's economic scale has reached $5.5 trillion. By the end of 2010, the amount of money stock will have reached $10 trillion. The broad money supply far exceeds that of GDP. By the end of September this year, the broad money supply had totaled 69.64 trillion yuan ($10.48 trillion), twice that of the GDP in the first three quarters of this year—26.87 trillion yuan ($4.04 trillion). It shows that money is not being used efficiently and is disproportionate with the real economy.
Worse still, many countries are putting excessive amounts of money into the markets, and not just their own markets, but foreign ones. China's skyrocketing foreign reserves have become the most important factor affecting its money supply. In the first three quarters of this year, the amount of outstanding foreign reserves grew $249 billion, the equivalent of dumping 1.6 trillion yuan ($240.7 billion) into the Chinese market. Therefore, foreign governments' excess money supply is putting China's economic stability at risk.
In the future, the biggest challenge for the Chinese economy will be liquidity. This is where the third question comes in: How will we manage the liquidity risk?
In my opinion, there are three ways to cope with this dilemma.
The excess liquidity must be absorbed. Fundamentally, the effective absorption depends on whether we have enough financial investment tools, channels and methods. In addition to the development of the capital market, we should also strive to develop a "financial asset pool" of bond assets, stock holdings, life insurance and pensions.
We should also expand investment channels for private investors so that the huge amount of surplus social capital and newly added credit can be directed into the real economy. In particular, the government should encourage the idle capital in Wenzhou, Zhejiang Province—the boomtown of private economy—to invest in industrial sectors or startup enterprises.
At the same time, the government should also intervene in the money market on a large and sustained scale. In other words, it should take advantage of the sovereign wealth fund or other financial stability mechanisms to accumulate foreign currency assets. It can not only offset the negative impact of the excess inflow of foreign currencies, but also balance domestic liquidity, which will turn capital advantages into economic advantages.