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... In Which SocGen Starts A Rumor That The Next QE Will Come From China

Tyler Durden's picture


The US is tapering, with the Fed knowing any further monetization of private sector bonds will lead to a crash in the already illiquid bond market;

Japan is stuck with its massive QE, jawboning every day a rumor that first appeared in November of 2013 (and which sent the USDJPY 500 pips higher and has so far been nothing but a lie) that it may do more, but has unleashed such a firestorm of imported inflation, plunging real wages and collapsing exports that there is nothing Abe or Kuroda can do to boost the Nikkei "wealth effect" or halt what now appears an almost certain 2014 recession;

Europe, too, saw a rumor emerge in November 2013 that it would also launch QE, however it won't: instead the ECB just went NIRP and is threatening to do ABS purchases, which just like the OMT pipedream will never happen simply because there aren't enough unencumbered assets to monetize (most of which are already have liens with local banks) while an outright QE would require redrafting Article 123;

So what is a world starved for "outside money" to do? Why make up another rumor, this time focusing on the last possible source of QE: China.

For that rumor we go straight to the source, SocGen, and its Alain Bokobza, who said on location in Hong Kong that "for the first time on my trip I fielded a question on whether China could or should do QE, perhaps as the ultimate tool to quell (rational) fears about sky high leverage."

And now let the rumors that China is launching QE begin

Full note from SocGen:

My taxi driver from the airport seemed to have been inspired by a formula one driver, speeding along in his forty year old gas-fuelled, noisy Toyota. Don’t panic, I’m still alive, just. Thankfully, the cab was at least air-conditioned, a must here in Hong Kong, the hottest (35-37°C) and most humid city so far on my mini tour of Asia.

The day started with a lot of attention from the press attaché at SG’s regional headquarters, an ace at organising interviews with the best of a local media ever keen to meet exotic foreigners still attired in those quaint jackets and ties and speaking with a peculiar French accent (the taxi ride didn’t help). While not one but two beautiful ladies spent 10 minutes applying make-up (bah!), I watched the CEO of Wendy's telling the story of how his company thrives in the kitchen of the vast global fast food industry.

Discussions here were not only very lively but also very global and very multi asset. The regional head of a German wealth manager suggested his local employees should get a day off if Germany wins the cup. Only one day? What do the Argentineans bid?

As the Hong Kong economy is 100% pegged to the US dollar and thus to Fed Funds, everyone seems to have a clear view of US monetary policy and Overweight is the default position on US equities (SG recommends Neutral). Managers are concerned about the potential negative impact of tighter US policy on EMs. And investors in this former colony of the British Empire are also on high alert for policy tightening in the UK by year end. We all easily agreed that UK gilts and equities have to be Underweight relative to Europe – all the while keeping a keen eye out for Sterling appreciation.

Europe was the subject of much animated debate. While many scenarios on likely outcomes remain open, we came to the clear conclusion that peripheral markets had to be preferred to UK assets. Alas, despite some interest, we didn’t find the time to focus on the radical policy shift which started in France mid January.

For the first time on my trip I fielded a question on whether China could or should do QE, perhaps as the ultimate tool to quell (rational) fears about sky high leverage. Central government carries little debt at 18% of GDP, but this jumps to 40% if you count the debt of the railway system and other quasi sovereign debt. Local government debt is around 60% of GDP, but the biggest worry is the recent increase in non-financial corporate debt from 150% to 180%. The Chinese consumer, by comparison, barely registers, with debt amounting to 10% of GDP. For now, policy makers have explicitly put growth drivers at the forefront of the policy agenda to ward off a hard landing. Perhaps paradoxically, we generally agreed that China equities are among the most attractive assets in the world.

Japan has similar borrowing levels but most of it is public debt. Questions arose on the third arrow (structural reforms) and its impact on asset pricing. SG’s Asia economist thinks that even if all the reforms are executed, it would only lift the potential GDP growth rate from 0.75% to 1.25%, hardly the stuff of dreams. Our market positioning on Japan is not aggressive (see Postcard from Tokyo).

The ranks of the ultra wealthy in Asia continue to grow. Asian wealth managers are seeing 10% annual growth in AUM. Compared to Europe the rich in Asia are on average much younger (45 vs 60) and many are self made, although some are second generation tycoons. The wealthy in Asia are on the whole comfortable with a very high risk profile, while rich Europeans are generally risk averse on Japan and Europe. Local asset managers appear significantly weighted in US assets, especially equities.

The taxi driver on the return journey was just as inspired as the one who drove me into town. Happy to report I arrived alive at what is one of the biggest shopping malls in the world with a couple of runways tucked into a corner.

Best wishes



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Fri, 07/11/2014 - 16:02 | 4948137 SheepDog-One
SheepDog-One's picture

Why actually do QE when just the rumors of QE work just the same? #hopyness

Fri, 07/11/2014 - 16:45 | 4948289 NotApplicable
NotApplicable's picture

Dafuq did I just read?

Fri, 07/11/2014 - 18:50 | 4948606 Escrava Isaura
Escrava Isaura's picture

NotApplicable ... Dafuq did I just read?

A misprint, applicable. That’s why you’re having difficulty in making sense.

You see: The rumor says US is tapering. That’s wrong. They meant to say “The reality says US is changing the name of tapering.”  

Fri, 07/11/2014 - 16:23 | 4948147 dontgoforit
dontgoforit's picture

Eskimo QE.  They rub your nose in it.

Fri, 07/11/2014 - 16:07 | 4948166 pods
pods's picture

Duh, if the Chinese start QE, people will lose faith in their pristine monetary system.

Crackheads in Camden have more copper than the Chinese.


Fri, 07/11/2014 - 18:59 | 4948569 hobopants
hobopants's picture

Ok so what's the belgium buldge all about? EU buying bonds for the FED right? So if the central banks go from jerking themselves off, to jerking each other off, have we really "tappered" anything? Mixed messages here.

Are they really afraid of killing the bond and repo market and thus tappering for realsies? or are they still buying a shit ton through proxies like waffle town, because they know they can't tapper without blowing interest rates up?

Funny you brought up the crackhead thing, someone ripped the copper wire out of the street light at the end of my street last week lol.

Fri, 07/11/2014 - 16:17 | 4948201 Fuku Ben
Fuku Ben's picture

Instructions to all CHAOS Agents

Accelerate the global collapse

ETA October 2014

Fri, 07/11/2014 - 16:24 | 4948216 trader1
trader1's picture
someone is bullshittin'





China Says It's up to US to Drive Global Economy BEIJING — Jul 9, 2014, 9:30 AM ET By LOUISE WATT Associated Press


Fri, 07/11/2014 - 17:39 | 4948432 SpanishGoop
SpanishGoop's picture

So we are doomed ?


Fri, 07/11/2014 - 16:23 | 4948223 taketheredpill
taketheredpill's picture





Alain Bazooka

Fri, 07/11/2014 - 17:02 | 4948330 NoDebt
NoDebt's picture

It's China's turn.  They all take turns.

Fri, 07/11/2014 - 18:53 | 4948611 Escrava Isaura
Escrava Isaura's picture

China's turn? Where have you been?

Fri, 07/11/2014 - 17:40 | 4948433 Son of Loki
Son of Loki's picture

So many people have so much QE money already in China I'm not sure what they'd do with moar?

[except buy more Cali and Vancouver and Calgary houses]

Fri, 07/11/2014 - 20:12 | 4948812 post turtle saver
post turtle saver's picture

hot potato!

"you jump on that grenade!... no, you!... no, I insist..." *boom*

so they were right all along... as long as the music keeps playing, no one needs to find a chair lol

Fri, 07/11/2014 - 21:03 | 4948958 RaceToTheBottom
RaceToTheBottom's picture

Exporting Inflation is kinda like QE no?

Sat, 07/12/2014 - 18:50 | 4950953 joethegorilla
joethegorilla's picture

We (the west) are at war with the Chinese over currency. One of us will break. This is why IMO none of the bankers went to jail because they are in on this. This is no different than what happened with Japan. The NWO (big business) wants that consumer/capital market opened up wide and I suspect it will be opened very soon. This is why big American banks have been over there full-force recently installing their debt apparatus in China. Like the Japanese, the money they're spending on property over here will be sent right back when the banks back in China call everyone's loan due. All of this US and EU property they are buying will be re-sold at some point.

By then, the rich kids of China will have their unlimited consumer wants (already well underway) and western-style laziness. If the Chinese would let the value of their currency increase to a market price, then you can bet they will be buying Disney trips, Swiss watches and French wine just like the rest of the wealthy world. And when their businesses start spending billions over here on advertising and branding like the Japanese did, then the fate of old China is sealed. Once brand-protection happens, war will be impossible due to economic interests of the ruling class. Or so the USA foreign policy says.

All of this predicated on China un-pegging from the Dollar. Were that to happen, the value of their currency rises, ours falls, and the ensuing effects on trade and investment benefit the west immensely. The staus quo of 'we get the stuff and you can have the paper' cannot go on forever because it's not fair to all those workers in China. When an industrial powerhouse pegs to your currency, then a race to the bottom will always ensue. The USA is behaving rationally becacuse those poor people are working their asses off for worthless paper right now while we have 50 million people lounging around playing xbox. And the rich always win, no matter what happens. It's the middle class worker who pays the price.         
