China’s leaders are increasingly relying on the central bank to help implement government programs aimed at shoring up growth, in an adaptation of the quantitative easing policies executed by counterparts abroad.

Rather than bankroll projects directly, the People’s Bank of China is pumping funds into state lenders known as policy banks to finance government-backed programs. Instead of buying shares to prop up a faltering stock market, it’s aiding a government fund that’s seeking to stabilize prices. And instead of purchasing municipal bonds in the market, it’s accepting such notes as collateral and encouraging banks to buy the debt.

QE -- a monetary policy tool first deployed in modern times by Japan a decade and a half ago and since adopted by the U.S. and Europe -- is being echoed in China as Premier Li Keqiang seeks to cushion a slowdown without full-blooded monetary easing that would risk spurring yet another debt surge. While the official line is a firm “no” to Federal Reserve-style QE, the PBOC is using its balance sheet as a backstop rather than a checkbook in efforts to target stimulus toward the real economy.

“It’s Chinese-style quantitative easing,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “But it’s not a direct central bank asset-purchase plan. China’s easing is indirect and more subtle compared with the U.S. or Japan.”

David Fuller's view

The last sentence above is likely to raise a few eyebrows among subscribers.  A subtle monetary policy from China sounds like an oxymoron to me, given the country’s financial turmoil in recent months.  Moreover, Xi Jinping seems content to move out of the limelight for once, leaving Premier Li Keqiang in sole possession of the financial hot seat. 

Does he have the tools and does China have the reserves to deal with this problem?

Absolutely - we are not talking about Greece writ large.  China now has the enjoyable challenge of buying a more orderly bull market, the building blocks of which are plenty of monetary liquidity but much stricter limits on margin trading.  Specifically, margin requirements should be gradually increased at the first signs of frothy activity, particularly regarding valuations. 

Will Chinese monetary officials succeed in this second effort?  They should because this is not rocket science.  Meanwhile, we should watch the charts for evidence:

China Shanghai A-Shares, China Shenzhen Composite Index, Hong Kong Hang Seng Index and Hong Kong China Enterprises (H-Shares) Index: the first two are leading the way following climactic looking sell-offs.  Demand appears to be returning above those initial lows.  All four are in areas of potential support and are overextended relative to their declining MAs.  They would have to close beneath the initial climactic lows to question scope for further and potentially significant recoveries.