China’s Quantitative Easing Will Help Little in Economic Recovery: Expert

Export value (million AUD, FOB) in mainland China versus the rest of the world. Courtesy of Wine Australia

Several Chinese state media recently said that the central bank’s extensive liquidity injection this year would inevitably result in significant inflation and a surge in home prices. They encourage people to consider buying a house, as real estate ownership can serve as an effective hedge against inflation. These outlets also stated that the property market has already begun to rebound, with increased transactions occurring in numerous large cities.

However, a China expert points out that large-scale quantitative easing by the Chinese authorities won’t cause significant inflation, as there has not been a corresponding increase in people’s income. It’s also unlikely that Chinese citizens will trust the claim that home prices will go up in the following years.

Chinese Media: Buy Houses to Fight Inflation

On March 4, the Chinese news portal Sohu published an article saying that inflation in China is inevitable. According to the report, investing in real estate is an effective way to combat inflation and withstand market turbulence.

“Buying a house is truly a good way to resist inflation,” the article said. “In 2023, the real estate market ushered in the era of low down payment, low-interest rate, and low entry barriers. The good timing to buy a house has come, and the opportunity should not be missed!”

State media China Business News presented an optimistic outlook for the Chinese property market in a Feb. 22 article. It claimed that the signals of a property market recovery are becoming increasingly evident in numerous cities across China, and nationwide data indicates the property market has shown signs of recovering.

Social Financing Dropped After Money Injection

What is the relationship between the massive money injection by the Chinese Communist Party (CCP)’s central bank and inflation?

To put it simply, inflation refers to the continuous and widespread rise in prices over time caused by the currency’s depreciation because the money supply exceeds the actual demand in the money market.

However, in 2022, the growth rate of M2 supply in China did not match the growth rate of social financing.

Financial statistics released by the Central Bank of China on Feb. 10 reveal that the supply of RMB M2 broad money increased by 12.6 percent year-on-year in January of this year, which translates to an increase of 7.38 trillion yuan (about $1.06 trillion), and represents more than a quarter of the total growth in 2022 and is a six-year high.

The significant increase in RMB M2 broad money supply indicates that the Chinese regime is printing and injecting considerable money into the market.

In January, social financing nationwide increased by 5.98 trillion yuan (approx. $859.2 billion), which was 195.9 billion yuan (approx. $28.15 billion) less than the same period in the previous year. RMB loans increased by 4.9 trillion yuan (approx. $704 billion), of which household loans increased by 257.2 billion yuan (approx. $36.95 billion); loans to enterprises increased by 4.68 trillion yuan (approx. $672.4 billion), according to the data from the Central Bank of China.

The growth rate of M2 far exceeded the growth rate of social financing, indicating that despite the massive cash injection, the demand for financing could not keep up. In essence, the funds are idling in the banks, failing to play a role in stimulating the economy. That is, China has entered a liquidity trap.

The data shows that the money has yet to enter the real economy nor reach ordinary people and small and medium-sized enterprises (SMEs). The government at different levels and state-owned enterprises obtained most of the funds. State-owned enterprises borrowed money to invest in infrastructure, and government entities borrowed new money to repay old debts. Their combined credit scale accounts for 95.7 percent of the total credit volume.

Both Supply and Demand Are Falling

So, will China see marked inflation this year?

Contrary to popular belief, lower inflation is not always better. Inflation within a reasonable range—the international norm is 3 to 5 percent—can benefit ordinary people, provided their income increases along with it. This inflation range does not necessarily increase the pressure on people’s daily lives and may positively impact their overall economic well-being.

As the economy grows and individual incomes increase, consumer confidence tends to improve, leading to increased spending. This boost in demand often incentivizes companies to expand their production capacity and offer more goods, leading to job creation and increased employee income. Consequently, the producer price index (PPI) and consumer price index (CPI) tend to rise as the economy expands.

Additionally, inflation can impact debt by decreasing the actual value of outstanding debts over time, making it easier for borrowers to pay them off.

But in reality, China is facing a situation where supply must decrease in sync with the decline in demand. This conclusion is supported by the latest trends observed in the CPI and PPI.

Data released by China’s National Bureau of Statistics reveals that the national CPI dropped by 1.1 percentage points year-on-year to 1.0 percent in February. Furthermore, the month-on-month change shifted from a 0.8 percent increase to a 0.5 percent decrease. Regarding PPI, there was a 0.6 percentage point year-on-year decline, with the month-on-month difference remaining flat compared to a 0.4 percent drop in the previous month.

The CPI trend reflects sluggish consumer demand. Ding Yujia, a researcher at Zhixin Investment Research Institute, told Chinese media that this indicates a slow recovery in the consumption of goods and services and suggests that effective demand in the consumer market needs to be strengthened further.

The need for more demand is also the main reason for the decline of PPI, as businesses in China face increased production costs but cannot pass it on by raising the price of consumer goods.

In terms of domestic demand, the recovery of household consumption is mainly concentrated in daily consumption, and the real estate market has remained the same.

Regarding international demand, export data reveals that China’s year-on-year growth rate of exports has experienced a sharp decline since the third quarter of last year. From January to February of this year, foreign trade orders continued to decrease, leading to a buildup of empty containers in the ports.

The fact that the CPI is not increasing while the PPI continues to decline suggests a possibility of deflation resulting from overall sluggish demand.

Shi Shan, a China expert and current affairs commentator, told The Epoch Times on March 9 that the CCP’s money printing has not benefitted ordinary people and small and medium-sized enterprises. Businesses are struggling as they wait for demand to recover while production costs rise, yet they dare not raise prices, and ordinary people are afraid to spend because their incomes have not increased. Consequently, the income of ordinary people has remained the same, leading to decreased consumer spending. Meanwhile, many enterprises need help to stay afloat.

“These enterprises are waiting for demand to recover,” Shi said. “However, they will likely see a further decline in demand. By then, they will be forced to reduce production scale and output. The subsequent layoffs and salary cuts in various industries will lead to a drop in household incomes, and consumers will become more pessimistic about the future and more conservative in spending.”

Shi believes the CCP’s massive quantitative easing this year will not cause significant inflation.

“The fundamental reason is that people’s income has not increased. The CCP’s dream of a price increase and inventory reduction in the real estate sector will not happen. These factors indicate that the CCP’s monetary policy has failed,” he said.