False prosperity of over-issued currencies

Editor's Note: The following are excerpts of a speech Liu Liange, president of the Bank of China, delivered at a forum on economy and finance in Shanghai on Saturday.

Global financial asset prices kept rising last year, and the global financial market is showing a false prosperity, with the deviation from the real economy increasing.

Since the outbreak of the novel coronavirus, the excess money issued by various countries has flowed into the stock market, real estate and other financial markets, and the asset bubble has become increasingly serious.

According to estimates by the International Monetary Fund, the amount of liquidity released by global monetary and fiscal policies accounted for more than 20 percent of global gross domestic product in 2020. And by the end of last year, the balance sheets of the top 10 economies exceeded $35 trillion, an increase of more than 50 percent from before the pandemic.

The easy liquidity has bolstered the balance sheets of companies, households and financial institutions, and is helping the global economy to recover. Global economic growth is forecast to hit 5.3 percent last year, which will render a two-year average of 1.1 percent.

However, the liquidity-fueled recovery is superficial, as there has been no real improvement in the competitiveness of the real economy and enterprise productivity.

The fragmentation of the recovery caused by excessive liquidity, rising prices, growing debt, bubbles in financial asset prices and disorderly cross-border capital flows pose potential risks for future economic growth. There are serious divisions among different economies and social groups in terms of the speed and sustainability of recovery. The wealth gap between countries and within societies is widening.

Global demand is picking up fast and inflation is rising across the board. And the supply bottlenecks in energy, chips, logistics, labor and other areas around the world have intensified, the gap between supply and demand has widened. The global CPI growth in 2021 will be about 4.3 percent, up 1.2 percentage points from 2020 and the highest since 2012.

That means global economic development is relying more on debt financing, and the debt ratios of government and the private sector are both rising, as the leverage ratio of governments, enterprises and individuals has climbed to historical highs. The flood of liquidity has created hidden risks for future economic growth, which calls for the attention of all stakeholders.