China is winning the race to print

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Courtesy of Also Sprach Analyst.

Many like to single out the Bernanke’s Fed’s monetary easing as reckless, irresponsible, or evil. QEnfinity only adds to this impression of Helicopter Ben being willing to print money to the moon. Not surprisingly, then, the US dollar suffers from the announcement of money printing.

The reality, however, is that the Fed’s balance sheet is not even the largest among major central banks. The size of the Fed’s balance sheet is now the smallest compared with other major central banks: Bank of England, Bank of Japan, and European Central Bank. And quite remarkably, ECB’s balance sheet-to-GDP ratio is now larger than the BOJ:

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As we all know, the People’s Bank of China has been printing more than almost anyone else and for much longer so it should come as no surprise that once you add PBOC into the mix, it becomes the largest:

Curiously, however, the PBOC’s balance sheet-to-GDP ratio is now contracting. In other words, while most central banks in the developed world are expanding their balance sheets relative to its economy, PBOC’s balance sheet is shrinking, and the pace of shrinking appears to be accelerating in recent months. Perhaps not surprisingly, as capital outflow limits PBOC’s balance sheet expansion and as the Chinese economy continues to grow fast (for now), the net result is that the size of PBOC’s balance sheet is shrinking relative to the economy.

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The chart below better visualises the point. It also shows the year-on-year percentage-point change of the PBOC balance sheet-to-GDP ratio:

The developed world’s central banks are increasing the size of their balance sheets (both in absolute terms and relative to the size of their economies) in order to ease monetary policy at zero bound. The fact that PBOC’s balance sheet has stayed almost constant for a year now and that it is shrinking relative to the size of the Chinese economy means that not only is PBOC not easing at all, monetary conditions have probably tightened inadvertently. Of course, there are still tools to offset such impact, such as “un-sterilising” the previously sterilised inflow by cutting RRR or deploy more reverse repos. However, we maintain that if outflow gets really bad, there are limits as too how much these tools can help to offset the tightening of liquidity.

With QEnfinity, there is some hope that money will once again be encouraged to flow intoChina. If money inflow is successfully encouraged, it could help PBOC to ease monetary condition, which are possibly be too tight at the present moment.

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