China's Potential Move Towards Quantitative Easing

China's Stimulus Package: A Disappointment

Despite the anticipation for a major stimulus announcement from China's Ministry of Finance, the market was left disappointed due to a lack of detail. Many analysts were expecting a stimulus package as large as 10 trillion rmb. However, the conference did not provide the expected details, leading to dissatisfaction among investors.

Experts' Reactions

BNP Paribas SA's chief China economist, Jacqueline Rong, expressed her opinion on the matter, stating that the policy to support consumption appears weak. She further added that it's too soon to predict a significant turnaround in deflationary pressure or a bottoming-out of the property market, which are the two key issues faced by the Chinese economy.

Market Expectations

Market analysts and investors were expecting China to introduce about 2 trillion yuan ($283 billion) in fresh fiscal stimulus. This could have included potential subsidies, consumption vouchers, and financial support for families with children. However, the Ministry of Finance's response to the size of the stimulus package was vague, promising to disclose the specific amount after the proper legal procedures have been passed.

Leak to Test the Waters

Following the lack of a concrete response, it appears that Beijing has reached out to its media outlets to gauge market reactions. Caixin Global reported that China might raise 6 trillion yuan from ultra-long special treasury bonds over three years as part of its efforts to stimulate the slowing economy. The funds would be partly used to help local governments resolve their off-the-books debts, according to sources.

Massive Debt-Financed Stimulus

However, this massive debt-financed stimulus will likely result in higher rates, potentially harming the markets that the Chinese Communist Party is trying to support. This situation could lead to China implementing Quantitative Easing (QE) to mitigate any adverse bond-market reaction.

Market Hopes

According to Goldman Sachs, for China to escape deflation and sustain the rally, China's M1 has to overtake its M2. This would require China to launch a historic credit impulse, including record new debt creation and QE, causing a global inflationary shockwave. The current equity market exuberance will only be sustained by a resurgence in excess liquidity.

Risks and Rewards

If China does not implement QE, M1 will fail to grow faster than M2, and the government will spread the monetary crowding out to more weak borrowers in the economy. This could result in an even bigger hole for China 12-18 months from now and global deflationary destruction. However, if China does implement QE, oil prices will likely soar, and bitcoin and gold values could increase significantly once Beijing triggers the next global reflationary tsunami.

Bottom Line

China's potential move towards QE is a complex issue with both risks and rewards. It will be interesting to see how the situation unfolds and what impact it will have on the global economy. What are your thoughts on this matter? Feel free to share this article with your friends and discuss it further. Don't forget to sign up for the Daily Briefing, which is available every day at 6 pm.