In a couple of words, the answer to my title is probably not. But that is my ‘gut’ feeling and I am not ashamed to admit that I haven’t done my homework on China to answer the questions that need answering to separate fact from speculation. And after reading this opinion piece by Christopher Balding in the Bloomberg View section entitled Why QE is not the answer for China I am certainly none the wiser for the main reason that the facts offered by the author could be indicative of many other kinds of phenomena both real and nominal that could either originate in China or elsewhere.
The author claims that the PBoC has lowered interest rates several times this year and it has done no good:
The People’s Bank of China has already slashed rates six times in a year, without producing any uptick in growth. To the contrary, deflationary pressures remain intense: Factory-gate prices have declined for four years running, falling six percent annually. Further easing might actually make the problem worse, not better.
I am unsure whether the PBoC actually did ease policy with its series of rate slashing or if it was simply chasing the Wicksellian equilibrium rate in China in order to maintain a neutral stance (or to limit passive tightening).
I am also unsure what type of monetary regime the PBoC employs, though I have heard it maintains a dollar peg. It would be an error in logic then to assume that it conducts policy in the same manner as either the Federal Reserve, ECB, or the BoE as Balding does here because the stage in development and makeup of its economy is different. If Mr. Balding is privy to the PBoC’s official monetary regime, whether it be an IT regime, a fixed peg, or something else, he doesn’t say. But it is possible that here he is comparing apples and oranges assuming the economics are the same – and they aren’t.
And if the phrase “inflation is always and everywhere a monetary phenomenon” has any truth to it, how, then, could easy money, however it is employed, increase deflationary pressure as claimed? Mr. Balding misses an opportunity to enlighten us on this point. But it seems more natural to assume that the opposite effect is also true, deflation is always and everywhere a monetary phenomenon, and all of the examples of deflationary pressure in China provided by Mr. Balding in the rest of his thesis point squarely at monetary tightening in China rather than easing.
It might just be that the dollar peg, if what I’ve heard about the monetary regime there is true, is importing deflation from abroad and hurting the Chinese economy by automatically tightening policy as the Fed does when that may not be appropriate. And what Mr. Balding has seen regarding the rate cuts, is not monetary easing, but chasing of the equilibrium rate as fast as humans can chase it which probably isn’t fast enough to prevent short term economic damage. A noble effort in any regard. I wish the Fed had chased the equilibrium rate as fast as they could in 2008!
At any rate, the question remains. Do the Chinese need QE? As I mentioned earlier, I don’t believe they do, which doesn’t put me in high level disagreement with Mr. Balding, I just strongly object to the logic he presented in his answer, believing it does more to confuse than to enlighten. China is still growing at a much faster clip than just about anywhere and it isn’t so far gone as to have done permanent damage to its long term social welfare and political cohesion with tight money as has tragically happened in the advanced economies. There is still time for the PBoC to implement meaningful policy reform, such as an FX float and shift in focus to an internal nominal variable, in order to render this downturn, if one can even call it that, as merely a soft patch that doesn’t spell long term economic doom.
By the way, my option of QE is that it is a hasty band aid measure for when monetary policy mistakes have reached critical mass and there is nothing else that can be done quickly enough to prevent unnecessary welfare costs. The need to use it is an indication that there is something seriously wrong with the policy regime and the central bank’s reaction functions, and probably also the policymakers themselves for allowing the need to occur.
PS: I will be traveling later this week and into the next. I will have only my iPad mini and smartphone with me, so posting will likely be nonexistent until I return.