QE, or not QE. That is the question markets are asking right now about the plan for a huge bond-buying program reportedly being contemplated by the Chinese government.
In a note out this afternoon Morgan Stanley says that while the rumoured program is both quantitative and easing, it’s not actual QE in the way markets have come to understand the term unless China’s central bank buys commercial bank assets.
And for the moment, the talk is that the plan would be limited to local government bonds. Analysts Helen Qiao, Junwei Sun, and Yin Zang say the mooted program may not be the broad-based “mother-of-all” stimulus packages many in the markets are anticipating.
They suggest that instead of delivering broad-based monetary stimulus – something the PBoC can do by using traditional policy measures such as rate cuts or reserve ratio requirement reductions – the rumoured program is instead about targeting “existing debt in specific sectors”.
Here’s Morgan Stanley:
It is supposed to clear the way for more infrastructure investment, especially those led by the central government. If properly implemented, we expect the combination of measures to lower risk free rates and reduce general funding costs.
By contrast, QE refers to central banks’ outright expansion of balance sheet when standard monetary policy is ineffective (e.g. short term rates reach zero). It is an additional measure to lower long-end rates at time when zero interest-rate policy (ZIRP) is applied.
In other words the program – should it eventuate – will be about targeted support for certain sectors rather than the entire economy.
While markets continue to speculate on what form, size and purpose the program is for, Morgan Stanley have their own view on what is likely to be delivered: “We think it will likely take the form of relending to offer more fund for banks to buy local government or LGFV bonds”.