China moves towards QE?


28 August, AtoZForex.com, Vilnius – It would seem China’s deflating economic bubble is becoming harder to sustain by day and attempts to re-inflate it do not yield any effects, resulting in Shanghai's stock crash.

With many questions and even more answers we'll demystify what kind of opportunities does the environment spur and what common misconceptions it creates.

China, CHINA moves towards QE

Dating back

Looking back in time, at the turn of the 21st century, China was facing a similar problem it has now - GDP figures fluctuating close to today's general benchmark of 7% (although it is a dream for developed economies). In order to eliminate the hurdle and rescue the economy, the government has opened China for global investors and with “surprisingly perspective” businesses together with an "overdrive" policy implementation, an inflation of the bubble had been initiated.

Before the global financial crisis in, the prosperity has reached its peak in 2007 of 14.2% GDP y/y. Afterwards, the bubble started stabilizing and deflating back into its "true value" form.

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Measures

As a result, GDP kept nearing dangerously close and finally broke the PBoC's previously set GDP benchmark of 7.5%, with a release of 7.4% in January 2015, manufacturing falling, exports slipping back and factories slashing prices, creating deflation, and laying off workers. All of it has led to a lowered GDP target of 7% and increase in measures taken to prevent further stabilization as a part of the new economic plan set by the new Chinese government.

To counter the move lower, with changed government plan, the central bank began cutting interest rates, which have now decreased by 1.4% to the current level of 4.6%. With lack of improvement signs an approximate 5 ton gold sell-off and a reserve requirement depreciation on Tuesday to 18% followed.

Further actions and outcomes

So far the implementation did not yield tangible result and with 2015 GDP estimation from IMF at 6.8% (also 6.8% from OECD and 7.1% from The World Bank), more drastic measures from PBoC could be expected. Yet, this should not be a surprise, as the Beijing has warned to be shifting the policy implementations for a slower but more sustained economy.

Therefore, with a possible GDP trigger of release below 7% a Quantitative Easing (QE) could be expected to take place.

If China moves towards QE, the action will boost the stocks higher and force the Yuan lower against the major counterparts. At the same time, the country will spur exports and break-off a huge chunk from the global trade prospects, also know as Currency Wars. However, the story of the QE structuring and its global effects is to be continued in another article…

Misconceptions

The current economic actions, however, should not be considered to have a direct influence on the Shanghai Composite Index, as it makes only a minor part of Chinese economy, compared to the New York Stock exchange in the US which amounts to a bigger part than the US economy itself.

Global impact

In case of failure to halt the economic slowdown and reduce the slipping prices and exports the global impact could be disastrous.

One of the biggest hazards from the would's second biggest economic engine could become as a worldwide recession. A stall of the engine would kill the global stock markets (but stabilize the Chinese stock market) and commodity prices. The affects caused from global recession fear can already clearly be seen in the markets.

The diminished Crude Oil demand and worry of Oil glut from Iran and Saudi Arabia would parish the black gold's prices, lowering energy costs and as a consequence indirectly harming the international economies.

Yet, some stocks, which have correlating profit and production cost, would benefit, but most importantly, out of the global chaos, safe haven asset Gold would emerge.

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