We came across a number of articles today that discussed the possibility of China implementing western-style quantitative easing to counter its current disinflationary economic slowdown. In short, we summarily dismissed these rumors and will continue to do so until we see them confirmed by an official source (i.e. the PBoC, State Council, CSRC, MoF, etc.).
The powers that be in Beijing are akin to a management team that says what it does and does what it says. More importantly, their official guidance for ~2 years now has been and continues to be one in favor of avoiding meaningful stimulus – either fiscal or monetary (see: commentary out of the PBoC’s Ji Zhihong on the targeted RRR cut).
We would view QE in China as a meaningful deviation from their “prudent monetary policy” guidance and should be interpreted as a signal that China’s intermediate-term growth outlook is actually more dour than current, already-subdued expectations.
Chinese policymakers definitely have room to ease with respect to existing inflation and consumer confidence trends, but any easing should immediately filter through to rising inflation expectations given the annualized FX weakness we will see as we progress through this year – which is in addition to annualized dollar depreciation (the DXY is down -3.3% YoY), as the CNY is still semi-pegged to the USD.
All told, it remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term. Credit growth remains particularly robust and early indicators such as the MAY Manufacturing PMI data suggest Chinese growth is stabilizing here in 2Q (although ahead of what we see as incremental weakness in 2H).
Conversely, China’s property market remains an unmitigated disaster, but it’s unclear to what degree Chinese policymakers are incentivized to rush to shore up an industry they’ve previously identified as suffering from overcapacity anyway.
In conclusion, it’s pretty clear that China’s current turbulent growth trajectory is a function of very deliberate policy tightening that continues to be unwound, at the margins, via piecemeal fiscal and monetary easing (i.e. increased public expenditures on infrastructure, PBoC OMO and targeted RRR cuts).
The more piecemeal China gets with its easing measures, the less likely it is to shift to a policy of broad-based, meaningful fiscal or monetary stimulus – such as the QE package now being bandied about in the press.
Perhaps some form of QE is implemented, but is very small in both size and scope (i.e. confined to certain sectors) – which would effectively render it not that meaningful after all. The cost of capital in China is both artificially low and well shy of recent peaks, so it’s unclear – at least to us – what QE would effectively accomplish.
If anything, implementing something as radical as QE would likely be perceived by market participants could backfire by sending a signal to the market that they are afraid to use traditional tools to arrest the economic slowdown. We underlined the phrase “afraid to use” because Chinese authorities continue to have ample fiscal and monetary scope to ease policy meaningfully; they just would prefer not to, given that the 2009-10 stimulus package is largely responsible for getting them into this mess.
A sharp leg down in growth is indeed something that would obviously walk our expectations towards meaningful stimulus out of Beijing, but that's hard for us to get there without relying on doomsday storytelling and a heavy dose of the availability heuristic (specifically the 2008-09 GFC).
For our latest deep-dive thoughts on China and how investors should (or shouldn't) be allocated to this economy, please refer to our 5/13 note titled, "BOOKING RESEARCH ALPHA IN CHINA; TURNING NEGATIVE".
Enjoy the rest of your day,
Associate: Macro Team