Zhou Xiaochuan, the former governor of the People’s Bank of China, said that if there is a full-scale trade war between China and the United States, even if the direct impact on the economy is small, market sentiment changes may also hit China.
Zhou Xiaochuan, who just retired this year, said that the tariff imposed by the United States on Chinese goods is not very important in terms of economic scale. Despite this, the impact on market confidence may have an impact.
“Everyone may get nervous,” Zhou Xiaochuan said in an interview with Bloomberg Lacqua. “No one really understands. Suddenly a trade war broke out. In terms of stock market investment, everyone may change their minds.”
He said that this kind of behavior is far more profound than the actual impact on the economy. Zhou Xiaochuan was interviewed at the Amboise Forum in Cernobbio, Italy.
At the time of the trade war, China has already faced a policy-induced economic slowdown. This prompted leaders to relax their leveraged program in case of future economic downside risks.
“Minsky moment”
Zhou Xiaochuan warned in October last year that China should guard against the threat of “Minsky moment”, that is, the risk of sudden collapse of asset value. The concept is named after Heyman Minsky, who believes that a long-term bull market could lead to a major collapse. China’s renminbi has fallen more than 6% since mid-June, making it the worst performing currency in Asia; China’s stock market has entered a bear market.
Zhou Xiaochuan said on Friday that it needs to be vigilant. China’s top priority is to avoid asset bubbles. “We should keep the currency floating with market supply and demand and avoid any form of distortion,” he added.
He said that globally, it is necessary to strengthen the supervision of financial assets, and stressed that the global monetary authorities have long maintained the risk of policy easing after the financial crisis.
“This should be a relatively short-term measure,” he said. “If it lasts too long, it is very dangerous.”
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