At dinner has it silently launched its Qe? The historical difference between the US and Chinese stimulus strategies is in fact in the operations: the Fed buys assets from the secondary market, while the PBOC intervenes through cuts in the bank reserve requirements that implicitly free liquidity in the system. It is a fact, known to all. However, this graph seems to show a very recent and drastic change in dynamics: according to data traced by the China Central Depository & Clearing Co. in the month of July in China there was a substantial increase in purchases of sovereign bonds attributable to the item “other investors”, the which includes central banks and clearing houses, such as Euroclear in Belgium. In total, this amounts to 196.5 billion yuan in value, which brought the total to 1.78 trillion yuan, about 256 billion dollars. In just one month.
Since Bloomberg traces the historical series regarding sovereign bond purchases, i.e. since autumn 2018, this represents the record increase. Who could have moved a similar value? Of course, not a commercial bank or a fund. Almost certainly, a central bank. And who could have had an interest, in a geopolitical moment like this, in buying Chinese government bonds with a shovel? Definitely not the US. By all accounts, what we witnessed last month was the prodromal act of a Chinese Qe in the strict sense. That is, direct purchases of assets by the PBOC and no more surgical interventions on bank reserves.
If that were the case, the move would be strategically one of those watersheds for the entire global financial assets. Also because, only in May, Ma Jun, an influential member of the monetary committee of the PBOC, wrote a vehement article for the country’s main financial newspaper, Financial News, in which he defined any possible proposal to buy government debt by the central bank as “a direct request to print money in order to finance the fiscal deficit. Something that would have a long-term impact on the macro-economy, sustainability and fiscal stability. Doing so would be tantamount to dropping the last line of defense of the government’s fiscal behavior. Financing through monetary stimulus could cause hyper-inflation, asset bubbles, currency weakening, excess debt and lower productivity ”.
More than a member of the PBOC, it seems to read the words of a Bundesbank adviser obsessed with the Weimar ghost. And, in fact, in the space of three months, everything seems to have changed. “Indeed, there is more than one possibility that PBOC has bought sovereign bonds, but perhaps this move should be read more as an attempt to directly finance the real economy, rather than as quantitative easing tout court. In short, the PBOC would buy bonds with an anti-Covid purpose and reinvest in projects with a solid return, ”Ming Ming, head of fixed income research at Citic Securities in Beijing, writes in a note to clients. But more explicit and sarcastic is the comment made by Michael Every of Rabobank, who points out that “China’s consolidated fiscal deficit was already double-digit before the coronavirus crisis, according to IMF data: where do you think it can be today, realistically? Therefore, it seems ridiculous to think that PBOC is not operating in backstopping, exactly like the Fed and the ECB, because it is obviously doing it ”.
Let’s put the question in perspective: according to Bank of America’s calculations, from the Lehman crisis to today the central banks of the so-called G-6, thus excluding the Chinese PBOC, have injected something like 24 trillion dollars into the financial system, a quarter of the World GDP. And considering the various forms of stimulus put in place by the Central Bank of Beijing, understood almost solely as targeted interventions on reserve requirements, the US investment bank expected that by the end of 2021 that total figure will have reached share 28 trillion dollars. But if Beijing, of course, will have to operate exactly like the Fed, Bank of Japan and ECB, thus purchasing assets directly, where will that amount go? And, above all, how can we get out of such a labyrinth of structural debt monetization?
Then there is another hypothesis that must be frightening. That is, the fact that Pboc has decided to intervene on the market as a support for the system, since it is aware of having excessively stimulated the stock bubble, pushing retail customers to mass investment, as shown in the graph and thus implicitly giving life to a possible , dangerous already seen of what happened in 2015-2016. Unless – which is far from absurd and unlikely, given the dead end character that support policies have assumed throughout the world – the PBOC does not intend to exploit the next explosion of the equity bubble inflated by housewives and farmers to launch an emergency Qe tout court, without thereby losing face politically with respect to the promises of common sense and fiscal rigor reaffirmed with pride until late spring.
But there is more that China is operating silently these days. First, the signing of a new oil concession in the Middle East, this time with Adnoc, Abu Dhabi’s national oil authority, a move that is expanding Beijing’s principle of influence and penetration in the area with billions of cash. a context that sees crude oil producing countries forced to fight with increasingly narrow fiscal breakevens. Second and most interesting for Europe, the fact that last week China sent six military drones to Serbia, yet another drastic signal of an imminent break in the tug-of-war between President Aleksandar Vucic and NATO, following the announcement of Belgrade of interest in purchasing S-400 anti-missile batteries from Russia. For the first time, China is militarily poking its nose into the Balkans, thus effectively reaching the extreme borders of Europe with its war technology. IS as Bloomberg points out, the Serbian President made sure that the arrival of the six drones had the maximum media coverage, so much so that he organized a triumphal photo opportunity which has not a little raised the antennas at the Atlantic headquarters in Brussels. Although the pandemic crisis has slowed down the operational programs of the New Silk Road, Beijing has nonetheless been shopping – direct or indirect, or generously financing governments in structural cash crisis – of strategic assets such as ports, energy utilities and robotics companies between the Mediterranean and the Baltic Sea. In a word, expansionism. Now, then, the hypothesis of a full-blown Qe.
Third, as the graph shows, at the direct request of the Kremlin and with interested benevolence on the part of Beijing, China would be paying for the Russian exports it receives increasingly in euros compared to the greenback benchmark, a clear strategic indication of de- dollarization of the two economies that actually create the backbone of the global equilibrium alternative to the US-led Atlantic one.
Beware of Chinese silence, because it is often a harbinger of a real storm more than the choreographic noise of thunder and premonitory lightning that usually characterizes the US moves. Europe, as usual, seems absorbed in something else. Except for Germany, the current President, whose Pavlovian and extremely negative reaction to the Russian announcement of the anti-Covid vaccine betrays internal tension on the positioning of foreign policy. And the fear that the October surprise predicted by many as a catalytic event before the US presidential vote on November 3 has Europe – and especially Berlin, with its scarlet letter linked to Nord Stream 2 – as its target and protagonist.
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