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There's increasing talk of a vast China QE program

There is mounting talk in markets that China’s central bank is about to embark on the path of unconventional monetary policy.

Made famous by the likes of the US Federal Reserve, Bank of Japan, Bank of England and European Central Bank, there are numerous reports circulating today that suggest the PBoC is about to begin a substantial quantitative easing program.

According to a report from the UK Telegraph’s Ambrose Evans-Pritchard overnight, “China is drafting plans for bond purchases to boost liquidity and shore up the country’s $2.6 trillion edifice of local government debt, becoming last of the world’s big economic powers to resort to quantitative easing”.

While seen as quantitative easing given it involves direct bond purchases by the PBoC some are already questioning how much stimulus the rumoured program will actually deliver.

Capital Economics’ Chris Williams, speaking to the Telegraph, suggested that “it is only akin to QE in the sense that it involves asset purchases by the central bank”. He believes that the mooted program is not a monetary policy measure but rather the PBoC “acting as lender-of-last-resort for local governments”. Williams noted that if the PBoC wanted to implement a broad round of policy easing to stimulate the economy they could simply cut the nations’ reserve ratio requirement which, at 18.5%, is “still very high”.

Despite this and the fact the program is only a rumour rather than factual it hasn’t dimmed the enthusiasm of Chinese investors. Only yesterday China’s Shanghai Composite soared by over 3% on expectations for further policy stimulus and chatter that many Chinese State-owned enterprises will be forced to merge in sectors suffering overcapacity issues.

With the rumours about proposed QE now growing by the day one can only wonder what to expect from Chinese markets on Tuesday. At time of writing the Shanghai Composite, which can be volatile during the day, was down 0.7%.

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