Posted inNews

Chinese QE – more curse than blessing?

Expectation is mounting that China is planning its own version of quantitative easing and investors weighing up how to play the world’s most populated country may struggle to assess the situation.

As the all-powerful government in China continues to see the stellar growth it had become used to in recent years ebbing away towards 6% and perhaps even below, it will inevitably reach for new levers to pull.

Just as they once did with Western manufacturing, the Chinese are likely to be looking at the United States, United Kingdom and to a lesser extent Europe’s recent experiences of QE and thinking they fancy a piece of that.

Even their regional rival across the sea Japan is starting to see some modest benefits to its huge QE scheme as the resulting fall in the Yen boosts export competitiveness.

Indeed, China has already taken some steps down the monetary easing road by cutting interest rates.  In early May the lending and deposit rates were cut by 25 basis points to 5.1% and 2.25% respectively.

While the extent of the benefits and longer term implications are debatable, QE has clearly helped the West and Japan, so why not China too?

The answer to this question lies in fully understanding just how different economically and politically China is. Reading across from the experiences in the West could lead to China itself and investors in the country coming spectacularly unstuck.

Perhaps the most fundamental difference Chinese equities markets have with the West and Japan is their maturity.

It could be argued with some authority that quantitative easing would put rocket fuel into a burgeoning, immature market already considered in bubble territory in a way not seen in the West.

The highly developed American and British stock markets with their seasoned domestic investor base could therefore be a dangerous false comparison with how Chinese shares and investors would react to QE.

What has been a strong but so far manageable QE uplift to stock markets in the West could be a rapid, large pumping up of an asset bubble in China’s case, with a dramatic bursting quicker than investors thought possible.

The way the real estate market has evolved in China does not bode well for how a QE fuelled stock market could develop. There was a careless goldrush to build new homes, shopping centres and offices which resulted is a big oversupply and the famous ‘ghost towns’ of unoccupied buildings. 

Then there is the fact that the tight control of markets and information in China relative to the West could make QE more dangerous in that if the market loses all trust in the government and regulators, there could be a particularly sudden rush for the door by investors.

There are already plenty of murmurs that the gross domestic product numbers put out by the government are not entirely accurate, to put it kindly.

As clients seek to tap into the upside from Chinese equities, if QE is launched the real value may be in protecting them from a bursting bubble. 

Part of the Mark Allen Group.