2015-09-07 12:39:40
Sep 7th 2015, 6:04 by S.R. | SHANGHAI
NARY a week has gone by this year without news of China s extraordinary
injections of cash into its own economy. The central bank has pumped hundreds
of billions of yuan into the financial system through an admixture of
short-term, open-market operations; medium-term credit instruments; and direct
loans to state-owned banks. Many have described it as Chinese-style
quantitative easing (QE). When a central bank buys up a large amount of assets
to expand its balance-sheet, it is indeed a modern-day form of money printing,
and deserves to be labelled as QE. There is just one rather inconvenient fact
when Chinese finances are examined more closely: in purely quantitative terms,
the central bank has been tightening, not easing. And it has been doing so for
several years already.
The chart below shows the balance-sheets of the world s four major central
banks. The QE paths of the Federal Reserve, the European Central Bank and the
Bank of Japan are well documented by the size of their assets, depicted by the
blue lines in the chart. The Fed s balance-sheet swelled in three large steps:
QE1, primarily in 2009; QE2, from late 2010 to mid-2011; and QE3, the final
surge that started in late 2012 and ended last year. For the ECB, the squiggle
shows a brief lift from the cheap loans it provided to banks in 2011 and 2012,
followed by a retrenchment as concerns about potential inflationary
consequences prevailed, and then a big rise since the start of this year, when
it officially launched QE. Japan s trajectory has been pretty much straight up
since April of 2013 when Haruhiko Kuroda, the BoJ s governor, first fired his
monetary bazooka.
What of the People s Bank of China? The PBoC s balance-sheet rose at a very
steady incline for much of the past decade but it has flattened out over the
past year. It held basically as many assets at the end of June this year as it
did a year earlier so much for the great, big Chinese-style QE.
It is even more striking when the Chinese central bank s balance-sheet is
assessed as a portion of GDP. This indicates how much base money (ie central
bank-issued currency) is being created relative to the size of the economy. To
simplify a bit, the monetary base needs to keep up with the economy, otherwise
it becomes a constraint on the broader money supply, credit issuance and,
ultimately, economic growth. In China s case, as the brown line in the chart
shows, the PBoC s balance-sheet has been declining as a percentage of GDP since
2010. That is the very time that the government began to worry about the waste
stemming from its massive stimulus, started in late 2008, to fight off the
global financial crisis. (For other countries in the chart, the brown lines
parallel the blue lines much more closely, because their GDP figures, the
denominators, have increased much more slowly than China s.)
Still it would be wrong to describe China s overall monetary stance as
tightening. The central bank is, in other dimensions, loosening policy. It has
cut benchmark interest rates five times in the past year. Through its multiple
cash injections, it has steered down borrowing costs in the interbank market.
It has cut banks reserve-requirement ratios (RRR), freeing up more cash for
them to lend without actually expanding the monetary base. Indeed, the broad M2
measure of money supply, which includes savings deposits at banks and
money-market funds, has grown considerably faster than the money base (11.8%
year-on-year in June for M2 versus 3.2% for base money). That is partly thanks
to the RRR cuts and also partly a reflection of a faster credit multiplier,
which tends to arise as financial systems grow. In this respect, it could be
argued that the central bank s quantitative tightening is actually more a
matter of its leaning against the wind, as it knows that money growth has
momentum of its own.
This leaves unanswered the question as to why there have been so many headlines
about Chinese QE when just the opposite has happened. The confusions appears to
stem from the two different channels through which a central bank can create
money. One is external-facing: if a country is running a current or
capital-account surplus, the central bank can buy the foreign cash entering its
borders, issuing domestic currency in exchange. The other is internal-facing:
the central bank can buy domestic assets held by the country s banks (QE is an
extreme example of this; conventional open-market operations are an everyday
thing). For years, the Chinese central bank relied almost entirely on capital
inflows from abroad as a source of money creation. The boom in its
foreign-exchange reserves since 2000 translated directly into monetary growth
at home.
Over the past year, with inflows tapering off and, in recent months, swinging
into reverse, China has switched to relying on the purchase of domestic assets
to expand its money supply. Capital outflows raise other concerns most
crucially, how long China can afford to run down its reserves to support the
yuan and why it is so reluctant to let its currency fall. But as far as the
central bank s cash injections go, they are themselves not cause for alarm.
Buying and selling domestic assets is standard operating procedure for central
banks managing their money supply. Chinese-style QE may come someday. But it
has not started yet.