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Published on : Apr 28, 2015

The Chinese stock market rose to a seven-year high with the news of the planned purchase of bonds worth US$160 billion by the People’s Bank of China (PBOC) to boost liquidity and to lessen the local government’s debt burden of US$2.6 trillion. This move makes China as the last of the major economies to resort to quantitative easing. Termed as “China’s QE”, it may not help the present economic slump in the country but the stock market leaped on the positive sentiments about the proposed purchase of the bonds. Also, the talk about the merger of the two oil giants of the country, PetroChina and Sinopec, made the investors euphoric.

The central bank is trying to help the local governments as it is becoming difficult for them to get market buyers under a new debt-swap reform which came into existence to curb the regional finances. According to Mark Williams from Capital Economics, the measure taken by the central bank is neither a part of the monetary policy nor part of the broad monetary loosening. He suggested that a reduced reserve requirement ration (RRR) by the PBOC would help. The current RRR is 18.5 percent, after the central bank slashed it by 100 basis points earlier this month. Though it has been the biggest rate cut since 2008, it was to offset monetary tightening rather than to help the local governments.

The PBOC’s chief economist, Ma Jun is optimist about the Chinese economy overcoming the current slowdown without the help of any major stimulus. However, finance minister Low Jiwei has warned that there are chances of China falling into “middle income trap” in the next five to ten years unless leverage is curbed.