Goldman Sachs: China Must Implement QE Now to Avoid Greater Economic Damage in the Future

China's Choice: To QE or Not to QE

According to Borislav Vladimirov of Goldman Sachs, China is now in a position where it has no choice but to implement Quantitative Easing (QE). If China fails to do so, its M1 money supply (currency in circulation and demand deposits) will not grow faster than its M2 money supply (M1 plus short-term time deposits in banks), leading to potential economic issues.

Vladimirov argues that without QE, the government will inadvertently cause more financial strain on weaker borrowers in the economy. This is because the more successful corporations and wealthier households are likely to save the economic stimulus, thereby stifling the multiplier effect and potentially leading to a larger economic downturn for China in the next 12 to 18 months. This could also result in global deflationary destruction.

The Potential Effects of QE in China

On the other hand, if China does decide to implement QE, it could lead to a significant increase in the price of oil, bitcoin, and gold. This would occur once Beijing triggers the next global reflationary wave.

The People's Bank of China (PBOC) has been implementing Quantitative Tightening (QT) for a decade, which, when combined with a generally loose fiscal policy from the government, has led to the crowding out of highly leveraged and risky borrowers. This includes households and developers in the initial wave.

If China decides to implement a large fiscal policy without QE, it could lead to more crowding out of weaker borrowers in the economy, such as steel producers and weaker local governments. This would especially be the case if the more successful corporations and wealthier households decide to save the economic stimulus, thereby killing the multiplier effect.

Key Indicators to Watch

Vladimirov suggests that there are two key indicators to watch: the dynamics between M1 and M2 money supplies, and the steepness of the yield curve. If the economic rally is to continue, M1 needs to grow faster than M2, and the yield curve needs to steepen significantly.

If neither of these things happen, China could find itself in a larger economic hole 12 to 18 months from now. However, Vladimirov does not recommend pulling out of the bull run in stocks just yet, predicting another 3 months and a 25-40% increase, especially if VP Harris wins the elections.

Bottom Line

China's decision on whether or not to implement QE could have significant global economic implications. The choice is not an easy one, with potential risks and benefits associated with both options. What do you think about this situation? Do you think China should implement QE, or do you think there are other options available? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, available every day at 6pm.