What do you think of the future?
Based on the past trade negotiations and the statements of China and the United States, we believe that the exchange rate policy is passive with the progress of trade negotiations. At this time, it is necessary to maintain the independence of monetary policy and the flexibility of interest rates. In order to cope with and prevent external shocks and stabilize expectations, the first condition is to maintain an adequate liquidity environment, followed by maintaining the downward flexibility of interest rates.
Although we can't trade Trump in the bond market like last year, we still have considerable currency flexibility and at least a stable liquidity environment, and the bond market can continue to be positive.
Market review and prospect
1. strategic outlook: how will trade negotiations affect interest rates and exchange rates?
Sino-US trade negotiations have changed dramatically again, becoming the dominant factor in the market after the May Day holiday. How to treat the influence of trade negotiations on the bond market? Let's discuss it from the perspective of monetary policy, first analyze the influence of trade negotiations on monetary policy, and finally calm down and analyze the exchange rate and interest rate:
1. 1. Trade negotiations and monetary policy
Looking back on the process of Sino-US trade negotiations over the past year or so, the process of talking while playing is accompanied by the evolution of monetary policy:
On April 3, 20 18, after the United States announced the list of 50 billion US dollars of tariff goods, on April 7, 20 18, the central bank announced the RRR cut 100 basis point to replace MLF；;
On June 201August 15, Sino-US negotiations broke down, and the US announced that it would update the list of 50 billion US dollars of tariff goods. On June 24, the central bank announced that it would cut the target of deposit reserve ratio by 50 basis points;
On September 20 18 18, the United States announced that it would impose a tariff of 10% on $200 billion of goods. On October 7,18 10, the People's Bank of China announced that it would lower the standard.
20 18, 12, 1, Sino-US negotiations slowed down. At the G20 meeting, China and the United States suspended new trade measures and set a three-month negotiation period. After the deadline of March 2, the Office of the US Trade Representative announced that the tariff rate of goods imported from China would not be increased from September 20 18.
In the early morning of May 6th, US President Trump announced that the tariff on China goods of $200 billion would be raised from 10% to 25%, and it would take effect on May 1 1. Before the market closed on May 6, the central bank announced the implementation of a low deposit reserve ratio framework for small and medium-sized banks, releasing liquidity of 280 billion yuan. Although the central bank did not mention the issue of trade friction in the subsequent press release, the RRR cut was implemented in May for the first time since 20 12. This is also the first time that RRR was cut before the opening of the exchange, and it happened a few hours after Trump tweeted. The significance of coping with external risks and stabilizing domestic and market expectations is obvious.
Looking back at the process of trade negotiations, it seems that we can simplify and draw a conclusion: the central bank has always maintained a loose monetary environment. Of course, on the one hand, this is the demand for liquidity for stable domestic growth and structural adjustment, and on the other hand, it is also the need to resist external risks.
It is particularly important to note that "imported risk" was mentioned for the first time in the government work report of 20 19, which shows that we attach importance to the external environment.
In particular, the central bank has recently made two major moves:
One is that Ma Jun, a member of the monetary policy executive committee of the central bank, said in an interview with the Financial Times in May 10:
"Judging from the actual impact of several stages of Sino-US trade friction in the past year, even if the trade conflict escalates according to the version threatened by the United States, China will take corresponding countermeasures. These measures have little impact on China's real economy, or will be significantly less than the impact implied by the 20 18 stock market reaction. The calculation result of our economic model is that if the United States raises the tariff rate of China's $200 billion export products from 10% to 25%, China will also take corresponding countermeasures. The negative impact of this scenario on China's GDP growth rate is about 0.3 percentage points, which is within the controllable range. "
"Last year, the stock market fell sharply, partly because the capital market could not judge the real impact of trade friction on the economy at that time and was prone to overreaction. In addition, last year, China also faced the problems of sustained economic slowdown, excessive contraction of financing channels of shadow banks, some improper public opinion impacting the confidence of private enterprises, and tax reduction. The superposition of these problems had a serious impact on the confidence of the capital market at that time. "
Second, after the release of financial and monetary data in April, on the afternoon of May 10, the central bank held a special media briefing to interpret related issues, including how monetary policy responded to external shocks.
Sun Guofeng clearly stated in his response: "In the face of changes in the internal and external economic environment, China's monetary policy has enough room to cope with various internal and external uncertainties, and the monetary policy toolbox is rich."
Zhou Xuedong added: Last night, Ma Jun, a member of the monetary policy committee of the central bank, was interviewed by the Financial Times and expressed his views on external shocks. I agree with him. From the past year or so, international trade friction is more of an impact on market expectations, especially psychological expectations. The impact on psychological expectations and market expectations is greater than the impact on the real economy. He has done in-depth research on this issue, and thinks that if the United States raises taxes on China's $200 billion export products to 25%, the actual impact on economic growth will be 0.3 points, which is smaller than what we feel. Of course, in the final analysis, the response to external shocks still depends on the macro economy itself, and we still have confidence in this. No matter from the economic growth, CPI, PPI or financial credit data, these macro data are basically stable, and we still have confidence in our hearts.
Obviously, when dealing with external shocks, the central bank can't sit idly by and will definitely respond positively, so our simple combing of trade frictions and the evolution of monetary policy is not a simple collage.
What's more, trade friction itself does have an impact on the real economy. In addition to Ma Jun's analysis, the calculation results of overseas Oxford University Economic Research Institute also show that under the latest tariff situation, the impact of trade war on China's GDP in 20 19 is between 0.3% and 0.4%, which is basically consistent with Ma Jun's formulation.
From the perspective of coping with the downward pressure on the real economy, monetary policy is even more unshirkable. Therefore, the impact of the trade war from 20 18 to the present on monetary policy has both the expectation and the demand to cope with the decline in the growth rate of the real economy. It is the first choice for the central bank to improve expectations, deal with downside risks and release positive signals of liquidity.
In this case, can we extrapolate directly and remain optimistic about future liquidity?
The exchange rate issue must be considered because it involves the independence of monetary policy.
1.2. Exchange rate constraint and monetary policy independence
Trade negotiations are bound to involve the exchange rate issue, so let's first clarify the attitude of China and the United States on the exchange rate issue:
The main requirement of the United States is that the trade agreement must contain exchange rate-related provisions, that is, China promises non-competitive devaluation and is transparent in intervening in the market, and requires the publication of "data on international reserve balance and intervening in the foreign exchange market, as well as quarterly balance of payments data and other data publicly reported to the International Monetary Fund (IMF) to avoid exchange rate manipulation." At the same time asked China to keep his promise.
Regarding the exchange rate, China's attitude can be summarized as follows:
(1) Do not engage in competitive devaluation; (2) Monetary policy is mainly domestic; (3) Strengthen countercyclical exchange rate adjustment and macro-prudential management of cross-border capital flows.
When Yi Chang answered a reporter's question during the two sessions, he basically gave a comprehensive and clear answer to the exchange rate issue caused by trade negotiations.
Combining the previous trade negotiations, we will find that when the trade negotiations are progressing smoothly, the RMB exchange rate is relatively stable or firm, and when the trade negotiations are tortuous or even deadlocked, the pressure of RMB weakening or depreciation rises.
Of course, there may also be the influence of the negotiation itself on market expectations and behavior.
However, it seems that the RMB exchange rate has been fluctuating with the progress of trade negotiations for a long time.
As far as this round is concerned, China and the United States negotiated in Beijing on May 3, 20 18. Prior to this, the dollar index rose sharply, and the RMB did not depreciate with it. On June 15, the negotiations broke down and the RMB depreciated rapidly. 65438+February 1 China and the United States set a negotiation time of three months. During this period, the Federal Reserve's monetary policy turned, and the RMB exchange rate appreciated with the decline of the US dollar index. Then the US dollar index remained high and stable, and the RMB continued to appreciate slightly. After Trump announced the recent tariff increase, the RMB showed a depreciation trend. Generally speaking, the change of RMB exchange rate is based on the US dollar index and fluctuates with the pace of trade negotiations.
On the one hand, the above fluctuation is the expected behavioral response of the market, on the other hand, it is also the strategy application in the negotiation process. However, from the perspective of direction, considering the trade surplus between China and the United States, it is unlikely that the RMB will depreciate unilaterally.
It is necessary to relax policies to stabilize expectations and stabilize the exchange rate to promote trade negotiations. At this time, if the exchange rate is relatively stable or even appreciates, we need to consider the space and flexibility of monetary policy. After all, it is ultimately necessary to implement the interest rate.
First look at the spread constraint.
(1) External situation: the interest rate of US debt has dropped.
On the one hand, the external situation has changed. With the downward trend of the global cycle and the suspension of interest rate increase by the Federal Reserve, the interest rate of US debt has been declining since the end of 20 18, and the currency cycles of China and the United States have moved from conflict to convergence, and the pressure of interest rate spread has been greatly reduced.
(2) Realistic thinking: How to keep capital flow and exchange rate stable?
In fact, even in the early days of US bond yields rising, China managed to narrow the spread while maintaining the stability of capital flow/exchange rate.
We reported earlier, "Can you have your cake and eat it?" Point out,
The spread mainly reflects the pressure of exchange rate and capital flow. Consider two situations:
If the exchange rate is stabilized by intervention, the expectation of market depreciation is reversed, and the pressure of capital loss is stabilized, then the interest rate can gain some space, because the exchange rate is "countercyclically adjusted" and the spread constraint is relatively "soft". Even under strong intervention, the spread cannot be a constraint:
In another case, the focus of macro-control is not on the exchange rate. The free floating of exchange rate can balance the internal and external pressures, but the research shows that in emerging markets, because there is no natural exchange rate, the expectation of depreciation will self-superimpose, which makes the free floating of exchange rate increase the pressure of capital loss-Mundell's "ternary paradox" is not established, and it is often a "binary paradox" (monetary policy independence and free capital flow can only be one of them). In this context, the central bank of a big country still pays attention to the independence of monetary policy. In fact, the direction of macro-control is mainly the control of capital flow. In this context, the spread is a "weak constraint".
If the focus of macro-control is the "administrative intervention" of exchange rate or the control of capital account flow, the spread is a "weak constraint" and the interest rate will release obvious space. In this way, the consumption of China's foreign reserves is small, and the pressure of endogenous depreciation is reduced.
1.3. Possible future trends of exchange rate and interest rate.
There are two main logical lines for the impact of trade wars on interest rates:
(1) guard against trade friction risks and stabilize expectations;
Regardless of the progress of trade negotiations, the impact of the current trade war on external demand is a foregone conclusion, and external demand has begun to decline by 20 19.
In addition, the trade war also has an impact on market confidence:
Last year, the stock market fell sharply, partly because the capital market could not judge the real impact of trade friction on the economy at that time and was prone to overreaction. In addition, last year, China also faced the problems of sustained economic slowdown, excessive contraction of financing channels of shadow banks, some improper public opinion impacting the confidence of private enterprises, and tax reduction. The superposition of these problems seriously affected the confidence of the capital market at that time.
—— Ma Jun was interviewed by the Financial Times in May 20 19.
One of the manifestations of risk is the abnormal fluctuation of the market and the risk of external shocks. For example, when the Asian financial crisis hit Hong Kong, the interest rate in Hong Kong could reach over 300%. As I said just now, the money market interest rate is about 2.6%, with an upper limit of more than 3% and a lower limit of 0.72%. External shocks may cause the interest rate to reach 10%, 20% or even hundreds. Therefore, if the money market is subject to expected or external shocks, it may fluctuate greatly, and policies should prevent these risks from spreading between markets.
-Speech by Yi Gang, Governor of China People's Bank, at Chang 'an Forum in February 2065438+2008.
The People's Bank of China has always attached great importance to the impact of external shocks. Actively do a good job in relevant policy reserves, comprehensively use various monetary policy tools, maintain reasonable and stable liquidity, grasp the strength and rhythm of structural deleveraging, promote stable and healthy economic development, and hold the bottom line that systemic financial risks do not occur.
-Yi Gang, Governor of China People's Bank, answered reporters' questions in July 2065438+2008.
It is necessary for the central bank to improve expectations, hedge the downward trend of external demand, put in liquidity and release positive signals.
(2) The exchange rate comes first, and the interest rate responds passively.
If the trade war negotiations evolve to the exchange rate level, the RMB exchange rate will appreciate passively to meet the demand of the United States for exchange rate, which will lead to a passive narrowing of the spread, but the spread will be subject to the exchange rate, which can be seen from the experience of Japan and Germany in the 1980s.
In 1980s, the Japanese yen and the German mark were forced to appreciate under the pressure of the United States in the case of a trade war represented by the trade friction between the United States and Japan. Take Japan as an example. In 1980s, the exchange rate of Japanese yen was obviously ahead of domestic policy (exogenous), and Japan's domestic policy was adjusted accordingly:
Due to the continuous pressure of appreciation, the Bank of Japan, in order to release this pressure (reducing the income from investing in yen assets and restraining the appreciation of yen), stimulated the domestic economy (loose monetary policy), greatly reduced the short-term spread between Japan and the United States, and also led to a sharp contraction of the long-term spread. The appreciation of the yen is accompanied by the convergence of interest rates between Japan and the United States (turning into negative interest rates).
Therefore, as a tool to prevent external shocks and stabilize expectations, the first condition of interest rate is an adequate liquidity environment; In addition, if the exchange rate goes first and the interest rate reacts passively, it may be accompanied by the narrowing of the spread between China and the United States.
All in all,
(1) The negotiation process of trade friction is accompanied by many signals of RRR reduction and monetary easing.
(2) The impact of the trade war since 2065438+08 has both the expected impact and the decline of actual external demand. The central bank should improve its expectations and take the positive signal of releasing liquidity as the first choice.
(3) exchange rate stability is one of the main demands of the United States, which is also a requirement to reduce the trade deficit between China and the United States. It is necessary to relax policies to stabilize expectations and stabilize the exchange rate to promote trade negotiations. The necessary and important policy demand seems to be limited by the exchange rate difference.
(4) However, on the one hand, the external situation has changed, the interest rate of US debt has been declining since the end of 20 18, and the currency cycles between China and the United States have moved from conflict to convergence.