By Wei Hongxu and Chan Kung*
With the Bank of Japan deciding to keep its monetary policy unchanged, the directions of major global monetary policies have become much clearer. Both the United States Federal Reserve and the European Central Bank announced that their interest rate will maintain the same, with Bank of England being expected to keep the interest rate unchanged as well. From such a phenomenon, major global economies’ monetary policies are entering a “inertial” quantitative easing.
With the economy of Europe and Japan still sluggish and show no signs of recuperating, the decision to maintain their current monetary policies imply they are more concern about the gradually diminishing policy effect on stimulus and on maintaining economic growth. Japan and Europe, the two major economies attempt to expand the economic support of their fiscal policies. Japan announced a new fiscal spending program to push forward the gradually slows down economic trend. Although the European economy has not resumed its growth, the European Central Bank estimated its economy remains resilient and will not fall into recession within the short term. Despite facing internal divergence, European countries are also attempting to push their fiscal policies to play a role in their economic recovery. While major economies maintain the interest rate, the European Central Bank and Bank of Japan continue using quantitative easing to inject liquidity into the market, while maintaining the intensity and frequency of buying government bonds. U.S Federal Reserve has further expanded repurchasing in the currency market and its balance sheet, inserted nearly US$ 500 billion worth of liquidity into its market, ensuring market interest rates to be regulated, as well as closing the financing gap of the bank. From this point of view, the central banks around the globe still “release money” into their markets, and the intensity does not become lesser. The global market continues easing up, but the excess capital situation has not been relieved.
Judging from the situations happened in Europe and Japan, their future economic growth is expected to linger at the low level for long-term, as in trapped under the shadow of “Japanification” of low or zero growth. Representatives from European Central Bank said, due to the Euro’s resilient economy, although the Eurozone will not fall into recession, their economy will not be revitalized and instead heading towards a low growth situation. With Japan continuously implement monetary easing policy, its economic growth remains a near-zero low growth. Such a situation means that next year, to underpin its economy, the monetary policies will continue to remain “inertia”. The U.S Federal Reserve expressed their optimism on next year’s economic prediction and stated that it may not adjust the interest rate in the coming year. However, to ensure the longevity of U.S bonds and stability of the capital market, the U.S Federal Reserve most likely will turn its short-term liquidity supplement into long-term quantitative easing. All these mean that global monetary environment will continue “injecting money” into the markets at its current rate until the economic environment changes into satisfactory situations.
However, the act of central banks buying back government bonds and continuing “pouring money” into the market is undoubtedly worsening the global debts. According to the prediction of the Institute of International Finance (IIF), for the past decade, the amount of global debts has increased more than US$ 70 trillion, and by the end of 2019, the total amount of global debts raises to US$ 255 trillion. In term of mature markets, the growth of the debts mainly come from general government debts. As for emerging markets, debts growth mainly come from non-finance sector corporate debts, with more than half coming from state-owned corporates. The global government debts in 2019 increased to around US$ 70 trillion, of which the total U.S treasury debt will reach a record high of US$ 22.7 trillion, and such trend shows no sign of restraint. On the other hand, the total debts of the emerging markets also reached a record high of US$ 71.4 trillion, not only more than double its combined GDP, the debts accumulation rate has not slowed down as well. International rating agencies have issued warnings on debts risks in countries such as China and India. Excessive debts will slow down investment return and increase the cost, thereby dragging the long-term economic growth.
The continuous monetary easing caused the increasingly common of negative-rates and zero rates in the global markets. Representatives from People’s Bank of China believe that the global economy has entered a new stage of low growth, low inflation and low-interest rates, with quantitative easing and negative interest rates becoming new trends in the international monetary environment. Data shown that 40% of the total global assets have been exposed to the negative interest rates environment, amongst them, the global bonds with the real rate of return less than zero accounted for 1/3 of the total number bonds issued, amounting US$ 20 trillion. ANBOUND has previously pointed out that negative or zero interest rates monetary environment is the reflection of excess capital caused by monetary easing. Such action has caused bubbles in the capital market and distorted the market prices. United Bank of Switzerland also had pointed out the difficulty in locating moderately priced varieties in the entire European, U.S and Japan investment-grade bond market; almost all investment-grade bond pricing has been distorted due to negative interest rates. Their trading price far exceeds the reasonable valuation, which worsens the shortage of fixed assets. Meanwhile, the liquidation of capital picks up some low-risks stock markets, such as the U.S and Japan. With capitals concentrates in such stock markets, there will be more bubbles in market valuations and prices.
ANBOUND also points out that, under global excess liquidation and stimulates in the markets, China will also face the impact of low and zero interest rates monetary environment. On one hand, under excessive liquidity, continuous capital inflows will cause inflation and affect assets price, which may exacerbate into the “stagflation” situation. Majority of small and medium companies lack financial support when facing poor credit ranking and monetary transmission mechanisms; the systematic contradiction of assets and capital shortage will be even more out of balance. On the other hand, competitive devaluation of global currencies can easily cause pressure on the mass inflow of capital and weaken the external competitiveness of business entities.
Following what People’s Bank of China has said, the “inertia” of current monetary policy has given space for the central bank’s monetary policy, hence it is necessary to seize the opportunity to adjust and maintain the balance between long-term stable growth and short-term “stagflation”. This is especially true when it comes to maintaining credit expansion and moderate inflation has become essential to ensure stable growth, stabilize economic leverage and risks prevention. China’s monetary policy needs to pay close attention to managing the short-term financial bubbles, keeping employment stability, as well as promoting middle and long-term technological innovation and advancement.
Final analysis conclusion:
Under the influence of U.S Federal Reserve, global major central banks will maintain their monetary policies, entering a state of “inertial” easing, bringing series of impacts and effects to financial markets and global economy. Facing such situation, to avoid falling into a liquidity trap and support stable economic growth, China needs to relax and elastically adjust its monetary policy.
*Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.
Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.