Is 2024 a year of China's QE?

While I was reading through the HKET newspaper today, Dr Tao’s comments reminded me on what I thought about and suggested previously at the beginning of 2022 when the Chinese property developers crisis began to unfold from Evergrande, followed by Kaisa etc. Back then, we believed that an acute style of rescue was required due to the unforeseeable consequences that can happen if the property sector is not rescued, or stay afloat in the already weakening economy back then due to trade war, and the severe disruption of supply chains and manufacturing as a result from shut downs from COVID.

2 years gone by, and most developers have defaulted on their bonds, and also impacting plenty of other industries within the mid to lower stream of the whole chain of business within property development. We did see policies being rolled out by the government on cutting lending rates, mortgage ratios, and tweaking on 2nd home ownerships etc, but it seems like the sector is still heading lower, with little signs of coming out of the whirlpool.

A weakening property market also lead to weakness in confidence of other areas within the investment universe in China, ie a weak equity market, Trust companies being insolvent, and a cut in deposit rates, giving little return to people holding onto cash.

Within today’s article, resonating on Dr Tao says, “QE should not be viewed as a tool for the evil, but a tool to be used wisely when required, and monitored sensibly over time”. QE turned to be “evil” indeed due to a delayed response from central banks in the west, and a lack of proactiveness in monitoring inflation closely in the west. The result was one of the worse inflation shocks in modern history, which lead into one of the sharpest rise in interest rates in decades. If QE was proactively monitored and managed, then the QT wouldn’t have been too excessive. One question to ask ourselves is, if QE was too much for too long, would QT also be too much for too long?

Shifting back to China, While GDP numbers appears to be reasonable in, and the reopening story of China last year appears to be uneven (with some industries doing better than the other, some are suffering in a downward spiral), based on what we are reading on the headlines, and on the ground conversations with different types of people, the longer this “limbo” phase gets dragged out in China, the worse the sentiment and confidence will become for China.

Most foreign investors by now have a very pessimistic view on HK & China and most likely has thrown in the towel in 2023. Without using serious tools now to revitalise the Chinese economy, it will only get harder in the long term, and require more effort to lift China out of this confidence downward spiral trap.

The Chinese government MIGHT BE timing for this huge stimulus to roll out when the rest of the world are also expected to cut rates and ease at the same time in 2024, mainly to dampen the depreciation impact of the RMB (to protect the interest of RMB holders, China’s allies), and to soften the negative impact from the stimulus, but with rising tensions in the middle east (Israel, Gaza, Yemen), natural disasters happening, and constant behavioural changes from the population (due to negative and unstable sentiments from the world), any factors can alter the path of rate cuts in the West for 2024 if certain inputs into the equation causes a reignition of inflation.

What the Chinese government needs to seriously consider right now is when to roll out a fine balance of large stimulus, and at the same time how to best monitor and control QE (or their own version of QE) the best way possible to uplift sentiments back into neutral or positive zone, boosting confidence in all fronts including consumption, financial markets, and property markets?

Riding a prancing horse at full speed, and be in full control of the horse at the same time somehow rhymes with the successful story of the FED creating a soft landing in 2024. It is indeed difficult but looks like the FED has done it. Will Beijing be able to do the same in 2024?