The China Path - (What recent events can tell us about the path forward for China) 11/07/15 by Matt...

7/24/2019 The China Path - (What recent events can tell us about the path forward for China) 11/07/15 by Matt Garrett

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2015 has been a year where Chinas central bank has had to repeatedly alternate betweenmanaging crises and averting disasters. Meanwhile, the longer-term plan has further

unfolded which is a transition to the services/consumer economy and a modernization of the

financial system. The end game here, if successful, is a transition where growth from these

emerging sectors is strong enough to overcome the drag from previous excess investment and

capacity. There does exist a real chance that the accumulated debt is too cumbersome to

bare, and a deflationary environment takes hold. This raises the question of what options are


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left if this downside case comes to fruition after rates have been taken down to zero and RRR

cuts arent having sufficient impact.

The ultimate act in modernization(being ironic here) would be the final policy response to

a deteriorating situation and that is Quantitative Easing (QE). Ive heard people say the

PBoC is doing QE, but they are more in the alphabet soup of lending facilities phase of

easing. This is closer to where the FED was in 08 with TALF, TSLF, CPFF, etc. In fact

China currently isnt ready to utilize QE if it were needed. Many of the reforms mentioned

above put in place the dynamics for QE to be utilized in a similar way that the FED, BOJ and

ECB have. These dynamics are: 1) fully floating currency; 2) incremental external debt; 3)

issuing larger proportion of standardized gov and corp debt securities. All of which would

take time.

In the absence of significant incremental QE from Chinese or other CBs, these are

potential narratives.

"B H1+;21 *2)/3 *83/ 23 ?08(2 3)2*)3 A+5D/)8(< =+* =>(93 8( (18E/1: )+

The China Path - (What recent events can tell us about the path forward for China) 11/07/15 by Matt...

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