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Chinese QE?

International | Apr 30 2015

By Greg Peel

The Fed did it. The Bank of England is still doing it. The Bank of Japan began a couple of years ago and the European Central Bank joined in this year. Quantitative easing – an expression known only to economics academics before 2009 and still to this day usually mispronounced by the mass media (“quantitive” easing).

Is the People’s Bank of China now doing it?

Well that’s the question being asked amongst the financial fraternity who are not economic academics. Aside from cutting its interest rate and its bank reserve requirement ratio (RRR), quite substantially, recently, Beijing has also moved to recapitalise the policy banks and offer debt swaps with the central bank to local governments. And wire reports suggest Beijing is contemplating allowing the central bank to buy commercial bank assets.

The opposite of “quantitative” in economics, to put things simply, is not “qualitative” but “price”. “Easing” is straight forward – it means allowing for more accommodative monetary policy. The standard easing tool of a central bank is to cut its lending rate, at which banks lend/borrow each day to balance their books, and represents the cost, or “price” of money. But a problem arises once you’ve cut your cash rate to zero.

Having cut its cash rate to zero in response to the GFC and finding it wasn’t enough, the Fed then decided in early 2009 to ease conditions further by expanding its balance sheet, which it did by purchasing government bonds and mortgage securities. The effect is an increased money supply, hence the euphemism “printing money”. The Fed added to the quantity of the money supply in order to encourage lending.

The PBoC’s cash rate is not zero. In China’s case the benchmark one year rate is currently 5.35% , hence far from zero. Thus there remains plenty of scope to implement further “conventional” easing measures.

But interest rate cuts are a very blunt tool. In Australia, the Reserve Bank has had to balance the economy-wide benefits of lower interest rates with the resultant property bubble, which is why the RBA has to focus on restricting mortgage lending individually. China’s initial stimulus package of late 2008 led the country into its own property bubble which Beijing then spent years trying to carefully deflate, without compromising GDP growth.

The bubble has deflated but Chinese growth has slowed, so aside from the odd interest rate cut, Beijing has implemented policy measures which target specific areas of the economy, such as housing and infrastructure, while using counter-measures to force out excess capacity in, for example, mining and metal processing. Clamp-downs on pollution, corruption and shadow banking have hurt the Chinese economy but will benefit the country in the longer term.

The corruption clamp-down has particularly hit heavily borrowed local governments. Allowing LGs to swap out their debt with the PBoC will alleviate LG stasis and get the economy moving again at the local level. China’s commercial banks are sitting on numbers of non-performing loans. Were the PBoC to buy assets from the banks, funds would be freed up to lend to the real economy.

As Citi puts it, “Supply-side policies appear more geared towards promoting investment in more “productive" areas (e.g. SMEs, innovation industries, urban infrastructure)”. Tackling debt in specific sectors clears the way for more infrastructure investment, suggests Morgan Stanley, especially that by the central government.

So is it QE?

The answer is yes and no. It’s definitely easing – no argument there – but “quantitative”? None of the above-mentioned policies actually expand the central bank balance sheet (quantity) other than a PBoC purchase of commercial bank assets, if indeed that policy is to be implemented. Other measures are “unconventional”, in the sense they don’t simply involve rate cuts, but given China’s interest rate is not zero, they are not strictly “QE” measures such as undertaken previously by the Fed and BoE and more recently by the BoJ and ECB.

Morgan Stanley sums it all up by suggesting that yes, it is quantitative, and yes, it is easing, but it’s not QE.

So now we can all get some sleep.

Westpac’s China analysts can argue economic semantics all day but are not particularly interested in labels. Westpac’s summation of Beijing’s convoluted basket of stimulus measures is simply “this style of policy can assist on every front”.

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