China’s too flush to need QE

Investors can ignore reports that China is about to embark on its own quantitative easing programme.

Ignore reports that China's central bank is about to start its own quantitative easing (QE), says's Free Exchange blog. QE in developed countries has involved central banks buying government and some other bonds; the People's Bank of China (PBoC) is set to buy local government bonds. But the similarities end there.

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For starters, China doesn't need to do Western QE, as overall monetary policy still looks fairly tight. Interest rates are at 2% and the reserve requirement ratio (RRR, the proportion of a bank's holdings it must keep as reserves rather than lend out) is an "unusually high" 18.5%, so there's room to cut those before introducing QE.

Also, QE elsewhere has been a broad measure for entire economies. This move merely sees China acting as a lender of last resort for revenue-squeezed local governments, who have had trouble finding buyers for their debt as property prices have turned down.

As Mark Williams of Capital Economics points out, it's really just targeted aid for local authorities. The bigger picture is that China has trimmed both interest rates and the RRR twice in six months, says Michael Lerner of Deutsche Bank. Monetary policy remains fairly tight, and the stockmarket has jumped by 40% in three months. "Imagine if the [central bank] really started easing."




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