FX MONETARY POLICIES
Where do the banks get the money? Basically, they print it. Not directly. Not obviously. But as the Bank of England has acknowledged, banks do not merely recycle existing deposits but actually create the money they lend by writing it into their borrowers’ deposit accounts. I n c o m ing deposits are needed to balance the books,
but at
some point these deposits originated in the deposit accounts of other banks; and since the Chinese g o v er n m en t owns most of the country’s banks, it can aim this funding fire hose at its most pressing national needs.
easing engaged in by Western central banks. According to a 2014 Wall Street Journal article:
In China’s context, such so-called
interest rates for some sectors, Citigroup’s economists said. They added that while such a policy would also put inflationary pressure on the economy, the impact is less pronounced than the U.S.- style quantitative easing.
Among the targets of these surgical strikes with central bank financing is the One Belt, One Road initiative. According to a May 2015 article in Bloomberg:
The money largely comes from loans from China’s state-owned banks
China’s central bank, the People’s Bank of China, issues money for infrastructure in an even more direct way. It has turned to an innovative form of quantitative easing in which liquidity is directed not at propping up the biggest banks but at “surgical strikes”
into the most productive
sectors of the economy. Citigroup chief economist Willem Buiter calls this “qualitative easing” to distinguish it from the quantitative
36 FX TRADER MAGAZINE April - June 2018
The purpose of China’s qualitative easing is to provide affordable financing
to select sectors, and it reflects Beijing’s intention to dictate
qualitative easing happens when the People’s Bank of China adds riskier assets to its balance sheet – such as by relending to the agriculture sector and small businesses and offering cheap loans for low-return infrastructure projects – while maintaining a normal pace of balance-sheet expansion [loan creation]..
Instead of turning the liquidity sprinkler on full- throttle for
the
whole garden, the PBOC is aiming its hose at specific parts. The latest
innovations include plans to bolster the market for
local government
bonds and the recapitalisation of policy banks so they can boost lending to government-favoured projects...
Policymakers have sought to bolster credit for small and medium-sized enterprises, and borrowers supporting the goals of the communist leadership, such as the One Belt, One Road initiative developing infrastructure along China’s old Silk Road trade routes.
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