In the last few days of March, the global financial market ushered in two blockbuster news, the protagonists of the world's two largest economies, the United States and China.
The U.S. Department of Commerce released the Personal Consumption Expenditures Price Index (PCE) for February 2024, which rose 0.3% month-on-month and 2.4% year-on-year, and the core PCE, which excludes food and energy prices, increased 2.8% year-on-year.
Many people know that the monetary policy of the United States is mainly based on changes in the price index, but most of them do not know that the price indicator that the Federal Reserve, which is responsible for formulating monetary policy, attaches importance to the PCE, and mistakenly thinks it is the CPI. In fact, the PCE is more of a reference for Fed officials, but this indicator was released later than the CPI, and as a result, attention was paid to the latter, and those who know know that Fed Chairman Powell's "long-term price increase is maintained at 2%" means that the PCE (non-CPI) will not rise by more than 2% year-on-year.
After the release of the PCE in February, the Fed naturally attracted the attention of the market, and Chairman Powell was not ambiguous, publicly stating that the PCE inflation report was in line with expectations, and at the same time said that the global capital market was not very happy.
"Cutting rates too early would be hugely disruptive," "More good inflation data is needed," "We don't need to rush to cut rates," "The Fed can and will be cautious about cutting rates."
It is estimated that friends who invest in stocks are already furious when they hear Powell say these words. Didn't Powell explicitly say that the Fed is not prepared to cut interest rates for the time being? In the past, when he expressed similar views, he mainly hinted, but this time he will not turn his back on others, and directly explain that Powell is openly "hostile" to investors all over the world.
It seems that the US will still maintain a tight monetary policy, and there is little hope of a rate cut in May. At the same time, diametrically opposite news came from China, and some people even directly shouted that China wanted to engage in "QE".
What is "QE"? It is the English abbreviation of quantitative easing monetary policy, and the United States, Europe, and Japan have all engaged in "QE" in the past few years, specifically the central bank directly buys treasury bonds and pays for all government expenditures, and as a result, a large amount of base money is put into the market. Combined with the fact that China's M2 balance in February is only one step away from the 300 trillion yuan mark, once the Chinese version of "QE" comes out, it will inevitably bring a monetary "tsunami".
A-shares quickly recovered 3,000 points in the past two days, which is related to the news of the Chinese version of "QE". Historical experience shows that the opening of "QE" in any country can bring about a wave of asset price increases, and the stock market, property market, bond market, etc. will all benefit.
This seems to be a good thing, but there are two sides to everything, and there are at least two hidden dangers in the central bank's direct purchase of treasury bonds. First, the abundant money supply has hit the price system, triggering a rapid rise in prices and even hyperinflation; second, the scale of government debt has increased and the leverage ratio has risen.
Will China turn on "QE" if there are pros and cons? I think there is a high probability that it will not, for two reasons.
First, the law does not allow it.
Unlike Western countries, the People's Bank of China (PBOC) cannot directly purchase government bonds and local government bonds in the primary market under the People's Bank of China Law. The purpose of this regulation is to prevent the central bank from becoming the government's "money printing machine" and to prevent the government from indiscriminately borrowing debts and the state issuing currency indiscriminately.
Second, there are still many policies available in the central bank's monetary toolbox.
Although the People's Bank of China Law does not allow the central bank to purchase treasury bonds in the primary market, it does not prohibit the secondary market from participating in treasury bond transactions, so theoretically speaking, the central bank has a way to break through the shackles of "not buying treasury bonds" to a certain extent, and the open market operation is not illegal anyway.
However, being able to do so doesn't mean it will.
China's central bank still has a number of monetary tools at its disposal. For example, although we have cut interest rates and reserve requirements (RRR) many times, compared with developed countries, both the reserve requirement ratio and the policy interest rate are still higher, and there is more room for interest rate cuts. For another example, we have long created high-credit funding tools based on treasury bonds, including reverse repo, medium-term lending facilities, PSL, etc., through which the purpose of placing and controlling base money can be accomplished.
Activating "QE" will only be considered when all the conventional monetary instruments available at its disposal have been exhausted and the results are still not as good as expected, and China is clearly far from reaching such a time.
As for why the Chinese version of "QE" was suddenly mentioned, it is estimated that some experts raised this possibility and sparked a discussion at a certain discussion meeting, and then some "good people" posted the topic on the Internet that did not form any conclusion at all, which triggered heated discussions in the market and affected the capital market in the past two days.
Still, the above two incidents reflect something. That is, even if the Swiss National Bank has taken the lead in cutting interest rates, the United States is still in no hurry to change its tightening monetary policy, while China has the potential motivation to increase the implementation of monetary easing.
The two superpowers' diametrically opposed monetary policies have made the financial game more complex and intense. When is the situation likely to change? It depends on when the United States strikes first.
It is impossible for our monetary policy to turn, at most it is a question of how easy it is, similar to whether to cut the reserve requirement ratio by 25 basis points or 50 basis points, and the variable is in the United States.
According to the Fed's dot plot, the U.S. will cut interest rates three times this year, and this expectation remains unchanged, so the timing of the first rate cut is very critical. In December last year, the market predicted that the first rate cut in 2024 would occur in March, but it clearly did not materialize, and the Fed just held the March FOMC meeting and kept interest rates unchanged.
The next meeting is held in May, will there be a rate cut? At present, it is still not, and the earliest time to cut interest rates may be in June, and the CME Fed Watch tool shows that the probability of a 25 basis point rate cut in that month is more than 60%. It can be seen that June will be a very important time node, the United States is very likely to begin to change its monetary policy, from absorbing global funds to releasing hot money to the world, capital markets, exchange rates and other important elements will change, and the financial game between major countries may enter a new stage.