Apparently China did not get the memo that the Fed’s apologists are furiously scrambling to packpedal on Yellen’s “6 month” guidance in virtually all media outlets. The is the only way to explain why Vice Minister of Finance Zhu Guangyao said overnight that “the U.S. Federal Reserve will begin boosting interest rates within six months after exiting “unconventional” monetary policy, and that will have a “significant impact” on the U.S. and world economy, as Market News International reported earlier. Zhu told China Development Forum this weekend “we believe a the Fed meeting this October, the exit of their quantiative easing will complete.” In other words while the spin for public and algo consumption is that the Fed will continue placating those long the stock market until everyone’s price target on the S&P 500 is hit and everyone can comfortably sell into an ever-present bid, China is already looking for the exits.
Understandably, Zhu Guangyao also indicated that China is uneasy about the impact of such a move. He should speak to the army of vacuum tubes which has no idea how to exist in a world in which the Fed isn’t injecting at least a few billions in reserves every month.
From Market News:
“The basic judgement, if there is no big accident, is that within six months after the Fed fully exits from its unconventional monetary policies, the Federal Reserve Bank will launch the process of raising interest rates and that will have a significant impact on the United States and the world economy as well,” he said.
“Based on the current progress, we believe at the Fed meeting this October, the exit of their quantitative easing will complete,” Zhu said at the China Development Forum at the weekend.
But Zhu’s comments — the most detailed from the top of the Chinese government since Yellen took over from Ben Bernanke last month — suggest that the authorities here are beginning to brace for an end to the extraordinary monetary accommodation of recent years. They come even as the Chinese government presses on with a sweeping reform program which has already plunged domestic financial markets into uncertainty.
The yuan fell sharply last week following the widening of the currency’s trading band to the U.S. dollar to 2% from 1% around the central parity. That was part of an ongoing move to deregulate the currency and interest rate regimes in order to better prepare the economy to handle swings in capital flows. The government also appears more willing to tolerate defaults as part of a long-delayed clean-up of the financial system.
But while the end of QE appears a given, at least until the market realizes there is no handover to an economy that is a moribund as it has ever been in the past five years, and the Fed has no choice but to untaper and return with an “even more QE” vengeance (it certainly won’t be the first time – just recall the “end” of QE1, QE2, Op Twist, etc), a bigger question surrounds whether China, already sliding in credit contraction and suffering a plunging stock market with its housing sector also on the edge of a bubble bust, is about to take over from the Fed and proceed with its own stimulus program. The answer is no.
Bloomberg reports: “China used big fiscal stimulus in 2008 during the global financial crisis and this made the economy heat up quickly, Finance Minister Lou Jiwei says at a forum in Beijing, according to a transcript of his comments posted on Sina.com’s website.”
This year, however, China will focus on quality of growth this year according to Lou, which means no shotgun stimulus program. He added that China will pay more attention to the environment and won’t use large-scale fiscal stimulus to spur investment in order to reduce overcapacity.
So with China caught in a deleveraging vortex, with the world used to Chinese “asset creation” in the range of $3.5 trillion each year, and with no endogenous credit creation to offset the phasing out of Fed QE, one wonders: will the next big surge in outside money come from the ECB, where outright QE is against the charter, or from the BOJ, where Abenomics has failed so miserably so far, that any additional surge in import food and energy prices may just lead to an outright recession. And it is in this context that we expect the stock “market” will surge to new all time highs again this coming week.