Want... As many experts have been expecting, China will soon launch a quantitative easing (QE) policy, and it will cause quite a stir on the global market, especially in the Asia-Pacific region. The move, on the heels of the unexpected cut on required deposit reserves recently, will further inject massive amounts of fresh funds into the market. Few believe however that financial institutions will utilize their extra funds in extending more loans to small- and micro-enterprises at lower rates, which is what authorities are hoping.
Instead, most observers believe that the money will further galvanize the bull ravaging the stock market, bringing the risk of high inflation and an assets bubble.
One of the main reasons for the loose money policy is to defuse the crisis of soon to be due local debts.
On the eve of the launch of the QE policy, China's Ministry of Finance has instructed local governments to accelerate issuance of municipal bonds, while mobilizing local government officials and bankers to lobby the People's Bank of China to permit commercial banks to purchase municipal bonds as collateral and to provide more three-year low-interest loans to local governments. Meanwhile, flush with funds, commercial banks will be much more willing to purchase municipal bonds, reversing its past reluctance, which was due to concerns over excessively high portions of such bonds in their available funds for making loans, not to mention the low yields of such bonds.
The outstanding amount of local government debt has topped 16 trillion yuan (US$2.6 trillion), more than one quarter of GDP and 50% more than the level in June 2013. These figures, alarming as they are, may be a gross understatement, according independent academic studies.
Total local government debt in China now amounts to 25% of the GDP, triple the red line of 9% for government debts, set by many developed nations. Moreover, as the IMF has said, China has been accumulating its national debt at a speed much faster than Japan, South Korea, and the US. The scale and speed of national debt accumulation augurs ill for the nation's economy, overshadowing it with the risk of major decline.
Therefore, a QE policy appears to be an inevitable choice for the People's Bank of China, although it will bring multiple thorny problems for neighboring nations and cross-border financial institutions, including an exchange-rate war and massive movement of international funds.
(Lin Chien-shan is president of the World Economics Society. Translated by Want China Times.)