China is set to use Pledged Supplemental Lending to support economy.
This is a strong policy signal. After we first wrote about this possibility more than two weeks ago, Bloomberg has published two news stories on this subject since then.
But there are still misconception about this policy tool. This is a quantity-based policy, a true QE measure, rather than the more traditional price-based policy tools such as rate cut.
When the market failed to clear using prices, it’s called a market failure and it’s the Achilles heel of efficient market hypothesis.
At this juncture, there are signs of market failing to clear at both the physical and the financial real estate markets - household not borrowing despite record low rates and developers’ bonds are being priced as if they were already bankrupt.
Liquidity traps and market failure are not signs of a rational market. As such, the PBOC is here to directly move supply and demand, rather than using price signal to influence supply and demand. It’s more effective, and has worked in the past.
There are discussions about a “China QE”. But the Chinese banks owns 2/3 of China’s gov bonds and these banks are the policy extensions of the PBOC — effectively it is QE in Chinese style.
Chinese developers high-yield offshore bonds are staging a bounce at a level near last Oct’s low. It was the time when the PBOC deployed ¥800bn PSL to support the economy, and marked the low of this cycle.
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