China's 1 Trillion Yuan Plan

China has recently gone on a liquidity frenzy to try and support its markets. The government of China is now contemplating an injection of as much as 1 trillion yuan into its largest state-owned banks to beef up their supporting role for a slowing economy. According to sources familiar with the plan, the lion's share would be coming from special sovereign bond issuance. This would be the biggest capital injection since the 2008 global financial crisis.

This is the latest news after a series of aggressive moves the Chinese government has been taking to lift its economy. The country has cut mortgage rates and key policy interest rates within the past weeks. While the capital of China's top six banks is well above the regulatory limit, efforts to raise their reserves go on due to economic hardships.

The People's Bank of China has even offered 500 billion Yuan as loans to certain entities to help them buy Chinese stocks. They topped it off with an incredible 300 billion Yuan to fund share buybacks. The central bank is literally funding companies to buy their own shares.

Even China's biggest banks are feeling the financial squeeze for the first time. Historically low profit margins, sliding profits, and rising bad debt plague them. Last week, Li Yunze, the head of China's top banking regulator, said the government would be increasing the core capital reserves of the nation's biggest commercial banks. Further details on that matter are yet to come.

The U.S. is also feeling the pinch of liquidity not kicking in fast enough. As someone who generally follows patterns of interest rate rises and cuts, imagine being in the U.S. and looking at a property. Here's a question for you, the reader: Would you rather take out a mortgage to buy it now, or wait one year? That is an important point mentioned by the WSJ's Nick Timiraos. If buyers know rates will be cut further, why would they buy now? They will want to wait until rates seem to have bottomed. Despite this, there is still a cost of living crisis. This is one form of lag that plays out after a rate change. This argument adds more weight to the side of rapid action by the U.S.’s central bank.

As China frantically unleashes all its tools to increase the money supply, and the case for rapid cuts marches forward in the U.S., global liquidity is being rapidly increased. This, by traditional definitions, is inflation.