Date
25 May 2017
The central bank's reluctant moves are not enough for the market to regain its confidence. Photo: Bloomberg
The central bank's reluctant moves are not enough for the market to regain its confidence. Photo: Bloomberg

QE measures may only bring temporary relief amid deflation risk

When China released the latest Consumer Price Index (CPI) on Wednesday, people realized why the People’s Bank of China (PBoC) rushed to launch its “quantitative easing” (QE) measures over the weekend.

The inflation gauge was up 1.6 percent in September, but the Producer Price Index (PPI) was down 5.9 percent, the 43rd straight month that it has declined.

It’s surprising that while PPI has been falling for more than three years, the CPI remains positive. How did that happen?

In Japan’s lost 20 years, the Nikkei fell to less than 20,000 from 40,000. The United States has also tried everything to get rid of the deflation risk.

Deflation is truly scary. China’s deflation pressure will only worsen if the central bank maintains the renminbi exchange rate at its present level.

Last year the PBoC unveiled a pilot scheme in Guangdong and Shandong provinces, allowing banks to use their credit asset as collateral to borrow from the central bank.

The policy was part of the measures to release more liquidity into the financial system.

Last weekend, the pilot scheme was extended to 11 more provinces and cities including Shanghai, Tianjin, Beijing and Sichuan.

It could be regarded as the Chinese version of QE, and it indicates the mainland’s big problem of deflation.

Does QE really work? The worked in the US, which did it in one critical stroke, thus sending a clear message to the market.

When market players and consumers feel assured of the central bank’s strong commitment, the expectation for deflation can be turned around.

In the case of China, PBoC’s reluctant moves are not enough for the market to regain its confidence.

Without innovation and reform, the release of liquidity can only delay the bursting of the bubble.

Internet finance is an innovation, while the reform of state-owned enterprises can only rely on the government itself.

If we look at Japan and Europe, we can see that QE measures alone can’t help the economies climb out of their morass. For China, the logic is the same.

The mainland stock market rebounded recently and market sentiment has improved.

QE measures may bring about a short period of relief, but investors should keep in mind the big deflation risk.

This article appeared in the Hong Kong Economic Journal on Oct. 16.

Translation by Myssie You

[Chinese version中文版]

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MY/JP/CG

Columnist at the Hong Kong Economic Journal

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