Financial analysts and economists have been warning for quite some time that the Chinese economy is on the verge of a slowdown. What might confirm those suspicions is a report that the People’s Bank of China (PBOC) is exploring options of employing bond-buying measures similar to former Federal Reserve Chair Ben Bernanke’s quantitative easing initiative.
In the event of a slowdown, the Chinese central bank may directly purchase bonds and other assets to help keep important sectors of the national economy strong. The report was published in the China Securities Journal, which is regulated by the central bank, and the article contained information that showed officials were concerned with bad debts accruing in the financial system and the weakness of the money supply.
Some of the measures being discussed include stimulus in the central and western regions of the economic powerhouse and direct asset purchases by the PBOC, such as government bonds, financial and railroad debt and state-supported housing bonds.
“For the Chinese to consider domestic bond purchases would be a significant move,” said George Magnus, a senior adviser to UBS, in an interview with the London Telegraph. “The authorities might conclude that QE packs more punch than further Reserve Requirement Ratio (RRR) cuts, and would be a better way to steer stimulus directly into social housing or local government finances where it is most needed without reigniting the lending boom in the wrong places.”
Also, the Ministry of Finance is encouraging local governments to institute increased spending efforts and to boost payments.
QE in Europe
It has been reported over the past several weeks that the European Central Bank (ECB) was mulling installing QE measures to improve the eurozone economy amid supposed deflation and low interest rates.
However, ECB president Mario Draghi told German officials that the regional central bank is still indecisive in participating in any large-scale bond acquisitions. His remarks to German politicians were an attempt to reassure them considering the long-standing tradition of inflation in the continent and constant inflationary fears.
Other financial experts are doubtful that QE measures would be imposed in the EU. “When push comes to shove it’s still very unlikely that they do QE or any asset purchases because the sizes are too small or it’s too controversial or it’s too hard to implement,” said Carsten Brzeski, economist at ING Bank, in an interview with the Wall Street Journal.
QE has been a major part of monetary policy for the Federal Reserve, the Bank of Japan and the Bank of England. In the United States, the central bank’s balance sheet has expanded from $500 billion a few years ago to more than $4 trillion to this date because of the immense bond-buying purchases.
Opponents of the bond-buying measures say that it has hurt the economy more than helped because the stock market is addicted to the stimulus, while inflation is on its way that will diminish the purchasing power of Americans.