Wednesday, April 29, 2015

The Flawed Analogy of Chinese QE

Yesterday, The Economist posted a very interesting article about the "flawed analogy of Chinese quantitative easing" (link here). Essentially what the article tells us is that although the Chinese "QE" can be superficially compared to the true QE of Europe and the US, in the sense that the People's Bank of China is also buying government bonds, etc. to increase the money supply, the comparison must end there.

Without a doubt, China is loosening their monetary policy, but "the QE analogy falls down in two ways." The article states that loose monetary policy and quantitative tools have long been the norm for China. "The government still sets a money-supply target every year (it is shooting for 12% M2 growth this year) and regulators rely on lending quotas to influence the behavior of banks." What this means, is that the Chinese central bank is increasing the money supply, every year, no matter what. That's one of the ways the Chinese "QE" differs from the US and Europe. China increases the money supply every year, whereas the US and Europe only implemented QE techniques after conventional monetary policies "ran out of room" after the economic crisis of 2008.

The second way the QE analogy fails is because it "exaggerates the extent of Chinese stimulus." In fact, the loosening of monetary policy is intended to replace cash that has left the Chinese economy, rather than "pump extra money into the economy."

The author argues that there is no reason for China to be using quantitative techniques. An economy like China's should first focus on interest rates before expanding the money supply. What are your thoughts? Does this change your opinion on the financial situation in China? Should China keep operating with the same methods?


  1. I talked about this in my reading summary last week a bit. I don't think that what they are doing is very wise as it merely covers there problem. They are more focused on investment rather than increasing productivity. China, to me, seems to be masking deeper financial troubles by utilizing this policy especially because as the article says they are really replacing money that has been moved out of the country; this means that they are not actually creating liquidity in their markets, but rather forcing the economy onward without generating the productivity to back it up.

  2. I agree with Taylor, China's QE policy does not seem necessary, it seems like a mask for the problem, rather than really trying to fix it. China's financial issues have become more apparent recently, and I have started to question other areas of its system as well. I do not think that China should keep operating with the same methods; pumping money into the economy does not seem like the right solution to China's problems. I agree with the author, that China should focus on interest rates before considering expanding the money supply.