China Hints that QE is Around the Corner

Market Trends - 27/04/2015

Not to be outdone by other global economic powers, China is contemplating the possibility of launching its own quantitative easing program. With the situation growing more dire on the ground, evidenced by the latest raft of dismal economic data, Chinese policymakers are looking for options to steer the nation back towards GDP expansion. The Shanghai Composite has soared on the announcement, keeping in-line with recent momentum in Chinese stocks despite the underlying hard-landing scenario currently playing out in the real economy. According to the latest from the MNI wire (owned by the Deutsche Borse Group), the People’s Bank of China is considering direct purchase of bonds issued by local governments. As a reminder, local government/municipal debt is a critical problem for Chinese policymakers. Many of these regions are plagued by over and mal-investment in infrastructure and other housing deals, many of which are presently underwater.

Besides the crushing amount of local debt, the housing bubble in China is in the process of slowly bursting, substantiated by the drop in average new home prices in 67 of 70 cities surveyed. Prices fell at a 5.70% annualized pace, highlighting another headache for policymakers as they try and steer the economy clear of crisis. China’s problems are not solely internal however, but also dependent on the dramatically plunging global outlook. Imports are dropping around the globe and exports are likely going to be quick to follow. If the Chinese export machine has nowhere to sell manufactured goods, the question remains from where growth will be derived. The lofty 7% GDP goal set by the Central Planners looks unattainable based on current fundamentals despite efforts by the Central Bank to open a flood of liquidity via the latest reserve ratio requirement cut. Struggles to contain the impact of pollution will only hamper stimulus efforts further as China is forced to choose one ambitious target over another. As problems mount, policymakers will be faced with fewer tools to combat the slowdown.


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