In China as it is the custom elsewhere, major policy changes are first leaked through the media. So a few weeks ago we first heard rumors of a possible quantitative easing program in China.
The economy has deteriorated so far that the move is merely seen as a logical extension of other easing moves by the central bank, such as interest rate cuts.
What wasn’t clear, however, is what form the quantitative easing would take. In America, the Fed has bought Treasury bonds from banks outright and in turn increased the balance of their reserve account at the Fed.
This kind of easing depends on new issuance from the central government, which the United States Federal government gladly supplied. The increase in the balance sheet of the Fed is indefinite and the transaction doesn’t involve collateral because it is an outright sale.
According to the newest leaks, however, China will use the European approach to take credit risk out of the market.
