China - A QE In The Pipeline?

More and more voices are calling for Quantitative Easing in China. An analyst from Goldman Sachs.

Chinese-style QE

The Chinese central bank gave a boost to stock indices by lowering its benchmark rates more aggressively than anticipated at the end of September. However, the euphoria already seems to be fading.

The Hang Seng fell nearly 10% on Tuesday. The cause is the lack of response from the National Development and Reform Commission. Investors did not get what they wanted: statements leaving the door open to QE.

As a reminder, the Chinese Ministry of Finance stated in April that it was in favor of the central bank buying Chinese debt securities like western central banks.

President Xi himself would be in favor. This is what the People’s Daily reported. The Chinese newspaper based its information on a recent book compiling statements from President Xi Jinping.

China has no choice but to undergo quantitative easing (QE) to restart the engine. This was claimed on Tuesday Borislav Vladimirov, an analyst at Goldman Sachs.

“To escape deflation and to make the stock market rally last, the growth of China’s M1 money supply must surpass that of the M2 money supply. China needs a historic credit stimulus through record new debt creation and the launch of Quantitative Easing. This will result in a global inflationary shockwave,” he stated a few days earlier.

La Chine va-t-elle se tourner vers le Quantitative Easing (M1☝️) pour relancer le crédit ? pic.twitter.com/nhOxH2TAaP

— Nicolas Teterel (@NTeterel) October 8, 2024

What is “QE”?

“QE” stands for Quantitative Easing. Quantitative easing in good French. This esoteric banker jargon means nothing more than printing money out of thin air.

In principle, QE is used to further stimulate the economy when interest rates are already at rock bottom. The central bank then buys corporate and/or government debt securities with its printing press.

For example, the FED still holds 12% of the US public debt, which is $4,300 billion dollars (not counting MBS). The ECB, for its part, holds the equivalent of €2,800 billion of European debt.

At its peak, the Fed held $5,800 billion and the ECB €3,300 billion. The figures are lower today because debt securities regularly mature. They therefore disappear from the central banks’ balance sheets. The Fed even went so far as to resell part of the securities.

The Fed’s Treasury bond bag is currently shrinking at a rate of $25 billion per month. It was $60 billion per month just a few months ago. The American central bank will probably stop reducing its balance sheet at the end of the year or early next year.

What is QE for? To cause asset price inflation to create a wealth effect with the aim of encouraging consumption and investment. In short, perpetuate the Ponzi…

Most importantly, central banks return the interest to their governments. However, the ECB holds nearly 25% of the debt, which means that European governments do not pay interest on a quarter of their debt.

In short, QE primarily allows states not to pay interest on the debt.

Bitcoin and the printing press

Chinese interest rates are still well above zero (~2%). So a little water should flow under the bridge before the PBoC considers QE.

According to Citi, the Chinese government will do more in due course. The bank stated in a recent note: “We remain optimistic. Valuations of Chinese stocks are still low compared to those of emerging market stocks, even after the last three weeks of rise.”

Goldman Sachs and HSBC have also raised their forecasts following the strong rise in recent days. The prospect of a QE seems to partly motivate this optimism.

A Chinese QE at the same time as the end of the balance sheet reductions of the ECB and the Fed is good news for the price of risky assets. In any case, the US stock market and Bitcoin remain lurking near their respective all-time highs.

Goldman Sachs expects the S&P 500 to reach 6,300 points within 12 months, from 5,730 points currently. Meanwhile, Standard Chartered advocates for a Bitcoin at $100,000 by the end of the year. “A drop in Bitcoin below $60,000 is a buying opportunity,” it said this Monday.

As Michael Saylor would say, “it’s going up forever Laura.” A currency existing in absolutely finite quantity can only appreciate against fiat Ponzi. HODL!