China – QE in the pipeline?

More and more voices are being raised in favor of Quantitative Easing in China. A Goldman Sachs analyst.

Chinese-style QE

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

The Hang Seng fell almost 10% on Tuesday. In question, the absence of signs from the National Commission for Development and Reform. Investors did not get what they wanted: statements leaving the door open for QE.

As a reminder, the Chinese Ministry of Finance declared 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 of it. This was reported by People’s Daily. The Chinese newspaper based itself on a recent book compiling the statements of President Xi Jinping.

China has no choice but to carry out quantitative easing (QE) to restart the machine. This is what Borislav Vladimirov, analyst at Goldman Sachs, said on Tuesday.

“To escape deflation and for the stock market rally to persist, the growth of China’s M1 money supply must exceed that of the M2 money supply. China needs a historic credit stimulus via a record creation of new debt and the launch of Quantitative Easing. This will result in a global inflationary shock wave”he had a few days earlier.

What is “EQ”?

“QE” for Quantitative Easing. Quantitative easing in plain French. This esoteric banker jargon means nothing other than printing money ex nihilo.

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

For example, the FED still holds 12% of the US public debt, or $4.3 trillion (not including MBS securities). The ECB, for its part, holds the equivalent of 2,800 billion euros of European debt.

At the peak, the Fed held $5.8 trillion and the ECB held €3.3 trillion. The figures are lower today due to the fact that debt securities regularly mature. They therefore disappear from the balance sheets of central banks. The Fed even went so far as to resell part of the securities.

The Fed’s bag of Treasury bills is currently decreasing 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 at the beginning of next year.

What is QE for? To cause inflation of asset prices to create a wealth effect in order to encourage consumption and investment. In short, keep the ponzi going…

Above all, central banks pay the interest back to their government. However, the ECB holds almost 25% of the debt, which means that European governments do not pay interest on a quarter of their debt.

In short, QE above all allows States not to pay interest on the debt.

Bitcoin and printing money

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

According to Citi, the Chinese government will do more in due course. The bank said in a recent note: “We remain optimistic. “Chinese stock valuations are still low relative to emerging market stocks, even after the last three weeks of gains.”

Goldman Sachs and HSBC also revised their forecasts upwards after the sharp rise in recent days. The prospect of QE seems to partly motivate this optimism.

Chinese QE at the same time as the end of ECB and Fed balance sheet reduction bodes well for the price of risky assets. Regardless, 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, up from 5,730 points currently. The Standard Chartered bank, for its part, is pleading for a bitcoin at $100,000 by the end of the year. “A drop in bitcoin below $60,000 is a buying opportunity” she said this Monday.

As Michael Saylor would say, « it’s going up for ever Laura ». A currency existing in absolutely finite quantity can only appreciate in the face of the fiat ponzi. HODL!