Seven trillion yuan in QE … it's all in the policy tea leaves
Is it or is it not quantitative easing?
Mainland investors have been debating it this week. Never mind the verdict, the debate itself has proven to be good enough to fuel a week-long rally in the share market.
The trigger did not come from a big gun, but a little-known blogger, Huang Sheng.
On October 11, Huang posted a commentary with an eyebrow-raising title: "Here comes seven trillion yuan! Here comes the Chinese QE!"
He was alluding to two policy announcements by the People's Bank of China on October 10.
One, the removal of the loan-deposit ratio that limited a bank's lending capacity to 75 per cent of its deposit. Two, the expansion of a lending programme that allows banks to use qualified loans as collateral to borrow from the central bank to 11 provinces from two.
Both moves were largely ignored by market watchers. After all, the central bank has announced half a dozen schemes with strange names in the past few months.
Yet, Huang said: "This is QE in disguise." He pointed out that under the scheme, banks could invest in local government bonds, pledge the paper to the central bank, and get more money for lending.
"There is no information on the size, maturity, rate and criteria of the lending scheme. The central bank has started the money printer," he said.
Huang is a nobody in China's finance world. The 37-year-old founded an online lending platform last year, pitching loans as small as 30,000 yuan with double-digit returns.
This, however, did not stop social media from swooping on his unusual take of what would otherwise have gone unnoticed as an usual policy manoeuvre. Overnight, 7 trillion yuan became the buzzword.
Analysts called it illogical and factually incorrect.
"The so-called Chinese QE does not exist," said Mingsheng Securities, noting that slow loan growth was not caused by the shortage in liquidity but demand.
AXA Investment Managers noted the central bank had lent 900 billion yuan to banks in Shandong province, while the amount to those in Guangdong was expected to reach 5 billion yuan by the end of this year. These numbers are nowhere near the 7 trillion yuan that "some have speculated", it said.
Huang retorted in his blog: "When 4 trillion yuan liquidity and 10 trillion yuan lending were introduced [in 2008], didn't the government insist that its monetary policy was prudent? We all know what happened after that."
The debate went on. The PBOC said nothing. Investors pushed the Shanghai Composite Index up by almost 4.5 per cent on Monday. Two days later, the central bank broke its silence, not with an official statement but with an interview with Ma Jun, the chief economist of its research centre.
Ma called Huang's argument "unfounded". He said there was no change in the country's liquidity target and lending by the central bank was only one of the factors affecting liquidity growth.
The market still went up 2.3 per cent. It is not because investors find Huang the blogger more credible than Ma the banker, nor is it because they are positive that a QE is on the cards. It is because mainland investors are masters of reading policy tea leaves.
First, Huang's articles survived the state censors despite the central bank's criticism. So have most related comments made by the netizens. That would not have been possible without a nod from the top. It would be far-fetched to call Huang's comments planted, but it is obviously tolerated.
Second, the central bank's belated rebuttal is considered academic. To protect the currency, it is bound to deny any QE.
Liquidity easing will exert new depreciation pressures on the yuan and weigh on its chances of making it into the International Monetary Fund's exclusive club of reserve currencies.
Third, the clock is clicking. The leaders of the Communist Party will meet from October 26 to 29 to discuss the country's development plan for the next five years. It is a time for the report card.
There is no quick fix to the economy. In the meantime, it does not hurt to have people thinking of the possibility of a QE, if all it takes is a little ambiguity.