It's Simple, China Is Really Doing Quantitative Easing

In a new report out this week, Barclays analyst Hajime Kitano explains why China’s devaluation of the yuan is essentially quantitative easing (QE) and why the move could have major positive implications for U.S. stocks. After some disappointing economic data out of China in July, more QE measures could soon be on the way.

Devaluation QE
According to the Kitano, the decision to devalue the yuan was made in an attempt to stimulate inflation, which means that the move can be looked at as QE. Kitano notes that it is unclear whether the move will be effective in raising inflation expectations in China.

U.S. impact
In the past, each of the four times that the Bank of Japan (BOJ) or the European Central Bank(ECB) have announced QE measures, it has always provided a major boost for the S&P 500. Surprisingly, when China announced its devaluation of the yuan, the S&P 500 declined by 0.96 percent.

Disappointing data
After a relatively strong June, the latest economic data out of China for the month of July was relatively weak. Year-over-year industrial production growth fell from 6.8 percent in June to only 6.0 percent in July, and retail sales growth declined from 10.6 percent to 10.5 percent. Fixed asset investment growth also declined from 11.4 percent in June to 11.2 percent in July versus expectations of 11.5 percent.

More stimulus coming?
Bank of America economist Xiaojia Zhi believes that it’s only a matter of time before the world sees more stimulus from the Chinese government. “We expect RRR cuts totaling 100bp for the rest of 2015 as our baseline and there is ample room to cut more if necessary given it is our view that RRR will be normalized to around 10% by 2020,” Zhi explains.