- Recent sharp rate cuts by China’s central bank have triggered discussions on potential quantitative easing, amid market volatility.
- Amid global central bank actions and economic pressures, China’s potential QE could reshape investment landscapes and impact global inflation trends.
In recent weeks, a growing chorus of financial analysts and market strategists has been closely monitoring China‘s monetary policy maneuvers, particularly the potential shift towards quantitative easing (QE). This move comes after the People’s Bank of China (PBoC) executed sharper than anticipated cuts to benchmark interest rates in late September. However, the initial burst of market enthusiasm has waned, evidenced by a nearly 10% drop in the Hang Seng Index early this week.
Quantitative easing, often referred to in shorthand as “QE,” involves a central bank purchasing government or corporate securities to inject money directly into the financial system. This mechanism is typically employed when traditional monetary policy tools, such as adjusting interest rates, have been exhausted. It aims to prevent deflation and stimulate economic activity by making money more readily available.
The context for China’s potential QE is set against a backdrop where, in April, the Chinese Ministry of Finance expressed support for the PBoC to embark on buying Chinese government bonds, similar to practices seen in Western economies. This sentiment was reportedly echoed by President Xi Jinping, according to insights gathered from a recent publication summarizing his viewpoints, indicating a governmental inclination towards such a policy.
Analysts like Borislav Vladimirov from Goldman Sachs argue that China has
“no choice but to undertake QE”
to jumpstart its economic engine. Vladimirov notes that for an effective halt in deflation and continuation of the stock market rally, the growth of China’s M1 money supply—a measure of money in circulation including cash and assets immediately convertible to cash—must outstrip the growth of M2, which includes M1 plus less liquid assets.
Furthermore, the implications of China’s QE could be far-reaching. A significant expansion in monetary supply might lead to a “global inflation shock wave,” as increased liquidity tends to drive up prices internationally.
Turning to global comparisons, the Federal Reserve (Fed) in the United States and the European Central Bank (ECB) have previously engaged in QE by acquiring substantial amounts of government or corporate debt. For instance, at its peak, the Fed held $5.8 trillion, and the ECB held €3.3 trillion worth of such securities. Although these figures have diminished due to the maturity of debt securities and efforts to reduce balance sheets, the impact of these actions continues to resonate through global markets.
The discourse around QE is particularly relevant given the current financial climate where, despite recent gains, Chinese interest rates remain significantly above zero at approximately 2%. According to Citi, the Chinese government is likely to
“do more when the time is right,”
signaling that further measures could be forthcoming as the country navigates economic challenges.
The discussions around Chinese QE are happening in tandem with changes in other major economies’ fiscal strategies, suggesting a potentially synchronized shift in global monetary policy that could enhance the valuation of riskier assets, including the US stock market and cryptocurrencies like Bitcoin. Both remain buoyant, hovering near all-time highs, with optimistic projections for future gains.