Author 丨Hu Tianjiao, Jia Junhui
Figure Source 丨 Figure worm
The monetary policy of the world's first and second largest economies is once again diverging. The Fed accelerated its contraction to ease high domestic inflationary pressures, while China's central bank insisted on a combination of cross-cyclical and counter-cyclical adjustments to stabilize growth.
On March 16, local time, Fed Chairman Powell fulfilled his promise and the 25 basis point hike boots landed.
On March 15, Beijing time, the People's Bank of China announced that in order to maintain the reasonable and sufficient liquidity of the banking system, it carried out a medium-term lending facility (MLF) operation of 200 billion yuan and a reverse repurchase operation of 10 billion yuan in the open market on the same day. Among them, the MLF and reverse repo rates were flat compared with the last time.
While Fed Chairman Jerome Powell is preparing to accelerate the tightening of U.S. monetary policy, China's central bank is also moving in its own direction. Even if the financial data weakened in February and the market's expected March MLF rate cut fell short, market participants said several times that China's monetary policy cut the RRR and interest rate cuts can be expected.
Monetary policy divergence between China and the United States
This is the fed's first rate hike since December 2018.
On March 16, after a two-day policy meeting, Powell said at a news conference that he had decided to raise the benchmark rate by 25 basis points to the 0.25%-0.5% range, and that it was appropriate to raise rates continuously.
Powell also said the FOMC has a plan to steadily raise interest rates and cut assets and liabilities during the year. He said high prices and poor supply chains have kept inflation above target. Inflation took longer to return to normal than initially expected, and there is upside risk.
As the economy gradually repairs, the monetary policies of China and the United States have diverged. Since mid-2020, China's monetary policy has returned to a stable and neutral, focusing on the balance of "stable growth" and "risk prevention". Yi Gang, governor of the People's Bank of China, said in the same year that the financial support policy during the response to the new crown epidemic has a phased stage and should be considered for withdrawal at an appropriate time.
"The Fed's 25 basis point hike is mainly due to the relative dovishness of geopolitical and energy implications, especially for ordinary American households." Zhao Yaoting, global market strategist for Invesco Asia Pacific (excluding Japan), said at a Meeting on March 17 that such a dovish policy is more favorable for emerging markets, including China, and will not prompt too much money to flow back to the US market.
According to the latest U.S. Labor Agency data, the U.S. CPI rose 7.9% year-on-year in February 2022, a 40-year high, and rose 0.8% month-on-month, the highest since November 2021. The University of Michigan Consumer Confidence Index fell to 59.7 in March, down from 62.8 last month and slightly weaker than market expectations.
At this moment, China's monetary policy is relatively loose and will continue to revolve around "stable growth".
After the release of China's financial data in February 2022, the market generally expected that there is room for policy to continue to exert force. In 2021, the People's Bank of China implemented two comprehensive RRR cuts, each by 50 basis points: on July 15, 2021, the People's Bank of China cut the reserve requirement ratio of financial institutions by 50 basis points; on December 15, the reserve requirement ratio of financial institutions was cut by another 50 basis points, releasing a total of about 1.2 trillion yuan of long-term funds.
Data released by the People's Bank of China shows that in February 2022, M2 increased by 9.2% year-on-year, adding 1.23 trillion yuan in new RMB loans. "Overall, the financial data in February was weak, the new credit and social financing were significantly lower than expected, and the structure was not ideal, reflecting the weak demand of the real economy." Wen Bin, chief researcher of China Minsheng Bank, said that this year's "Government Work Report" put forward the target of economic growth of about 5.5%, which is a medium and high-speed growth on a high base.
Wen Bin believes that achieving the 5.5% growth target requires further policy support. "Monetary policy should give full play to the dual functions of aggregate policy and structure, find the right time, reduce the RRR and interest rates, there is still room, increase efforts to boost demand, and promote economic operation in a reasonable range."
"China's monetary and fiscal policy, while not yet in a 'U' shape, does show signs of loosening, and it will indeed help promote liquidity and business activities in the future." Zhao Yaoting said that China's economic growth target is about 5.5%, and policymakers focus on both stabilizing growth and promoting growth, which actually builds a policy-style backing and may support stock market performance.
Vanguard Asia-Pacific chief economist Wang Qian told reporters that the Fed and the central banks of almost all major economies are raising interest rates, which will certainly limit China's space for further easing. But China should be able to maintain the independence of monetary policy in accordance with domestic economic conditions. "Given the continued downturn in real estate and the sluggish recovery in consumption and services, the PBOC still has room to further cut reserve requirement ratios and interest rates in the first half of the year."
"The divergence of Monetary Policy between China and the United States is obvious to all." Zhao Yaoting said that China's relatively loose policies are not currently reflected in (asset) prices or investment intentions. Stimulus in the coming quarters will boost growth, which is also a factor for investors.
The divergence stems from the misalignment of the U.S.-China economic cycle
"Judging from historical data, there is a phased monetary policy divergence between China and the United States, and the root cause of the differentiation lies in the differentiation of the Sino-US economic cycle." A research report by CITIC Securities believes that the monetary policies of China and the United States have a high degree of independence and are highly correlated with the economic cycles of their respective countries.
CITIC Securities said that under the goal of stable growth in the first half of this year, China's monetary policy easing direction is clear and the policy is in the forefront; while high inflation is expected to push the United States to accelerate the opening of the interest rate hike cycle. Inflation in the United States may fall in the second half of this year, and there is a possibility that the pace of tightening will slow down; inflationary pressures in China are expected to increase in the second half of the year, and the easing of China's monetary policy may be reduced.
CITIC Securities believes that "stable growth" this year is still the primary task, under the tone that China's monetary policy is dominated by me, it is expected that this year's monetary policy will continue to be more active and earlier, the direction of easing is clear, and the short-term Fed tightening monetary policy is weaker in China's monetary policy constraints.
CICC's fixed income research team said that behind the reversal of Sino-US monetary policy is actually the dislocation of the Sino-US cycle.
"With 2020 as the starting point, the pace of China's economic cycle is significantly faster than that of the United States." CICC said China was ahead of the United States in achieving a recovery in production and life, ahead of the United States in tightening liquidity as early as the second quarter of 2020 to deal with potential economic overheating risks, including inflation before the United States.
CICC pointed out that US inflation is still rising, the overall stagflation is in the middle and early stages of stagflation, and the closing of monetary policy is imminent. Considering that China's policy-level easing will be partially offset by the negative drag of tighter US liquidity, it is expected that the Central Bank of China's easing may further exceed expectations.
"Economic data shows that China's economy is working well. The year-on-year increase in the M2 money supply briefly rose from 8% to 11%, indicating that the Central Bank of China has only made a slight correction to monetary policy so far. In addition, the difference in the inflation rate between China and the United States will enable the Chinese central bank to maintain a dovish stance in the medium term, Zhao said.
IN ITS RESEARCH REPORT, CICC Fixed Income said that in addition to the divergent economic characteristics of China and the United States, the level of inflation will also lead to a more obvious differentiation of monetary policies in the two countries in 2022.
Under multiple factors, the degree of inflation in China and the United States is very different. CITIC Securities believes that the follow-up needs to pay attention to the pace of Tightening of the Federal Reserve and the economic development trend of the United States, and there is a risk that the US tightening cycle will affect the window of China's monetary policy easing.
Guan Tao, global chief economist of BOC Securities, said that in 2022, the potential risks caused by the further differentiation of Sino-US monetary policies will also attract market attention again.
On March 16, the Financial Stability and Development Committee of the State Council held a special meeting. The meeting pointed out that with regard to macroeconomic operation, it is necessary to implement the decision-making and deployment of the party Central Committee, effectively revitalize the economy in the first quarter, take the initiative to deal with monetary policy, and maintain moderate growth in new loans.
China's "steady growth" policy will partially offset the impact of US interest rate hikes
Emerging markets are watching the Fed's tightening policies warily, and investors are watching for opportunities at risk.
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said the Fed's 25 basis point rate hike was just as expected. The current median of the dot plot shows that seven rate hikes are expected in 2022. But he still thinks the Fed will eventually raise rates 3 or 4 times this year. "From an asset allocation perspective, we remain cautious about equity and credit markets."
Zhao Yaoting pointed out that during the Fed tightening cycle, the US stock market tends to provide positive returns, and this will be the case this time. However, the market may face the prospect of a significant tightening of policies and profit growth by the Federal Reserve, especially in the face of rising raw material prices. Stock market gains could be limited, especially if the Fed is too aggressive. Among stocks, they prefer more value stocks to growth stocks and more bullish cyclical stocks to defensive stocks.
Rate hikes usually push the dollar upwards. Since the collapse of the Bretton Woods system in 1971, emerging market countries have been affected to varying degrees in the upward cycle of the US dollar. For example, in the upward cycle of the US dollar from 2014 to 2015, emerging economies such as Turkey, Russia, and Argentina experienced significant exchange rate fluctuations.
Inevitably, the Fed's interest rate hikes will have an impact on the global economy. Through a study of the impact of fed rate hikes on financial markets in the past, Deutsche Bank found that a common pattern is that slower growth usually occurs a year after rate hikes, and the full effects of general monetary policy can take several quarters to become apparent.
"From the first rate hike, usually in the first year of a rate hike, economic growth remains strong, inflation continues to rise, the stock market continues to rise, the credit crunch tightens, and the bond yield curve flattens; the second year, economic growth begins to slow, the stock market stabilizes, credit begins to expand, and bond yields decline." Deutsche Bank Research Report pointed out that the possibility of negative growth in 2022 is very low.
"This possibility will continue to increase from 2023 onwards. When the Fed raises rates for the first time in the first half of 2022, it will have an impact on the economy and financial markets in the next two to three years. Deutsche Bank expects.
But stimulus packages from China's central bank have at least partially offset the impact of the Fed's tightening policies on global economic growth.
Some emerging markets are somewhat comforted by the fact that commodity exporters and Asian neighbors will benefit from China's economic growth this year.
ABN AMRO Bank (ING) pointed out in a research report that since Chinese banks tend to issue loans at the beginning of the year, loans in January will usually increase significantly compared to December. "But even compared to the same period last year, the increase this year is considerable, which shows that China's potential economic activity is stronger than last year."
"The impact of China's relatively loose monetary policy on neighboring countries depends mainly on the implementation of policies, especially infrastructure investment." Zhao Yaoting said that if local governments push more for infrastructure construction, it will definitely have a boost to the economies of neighboring countries, but the biggest driver is still consumption.
How will asset prices be affected?
The monetary policy between China and the United States has once again diverged, the Sino-US interest rate spread has converged rapidly, and the 10-year Yield Spread between China and the United States treasury bonds has narrowed by nearly 100 basis points throughout the year last year.
"Investors should be prepared to deal with potential policy disagreements." Tracy Chen, global portfolio manager at Franklin Templeton-owned Brandywine Global, said a narrowing interest rate differential would put downward pressure on the renminbi, all under the same terms.
The U.S.-China spread is narrowing, and the pace at which overseas investors have been holding Chinese onshore bonds since January has begun to slow. UBS expects U.S. Treasury yields to rise further modestly, with the 10-year Treasury yield set to rise to 2% in June.
"It is important that inflation in China and the United States could converge to around 2.3 percent in the fourth quarter of 2022, as falling U.S. inflation will significantly narrow the real spread between the renminbi and the dollar." UBS said the 100 basis point gap reflected the nominal interest rate spread between U.S. and Chinese Treasuries with inflation rates at the same level at the end of the year.
At the long end of the yield curve, UBS expects the spread between the renminbi and the dollar to narrow to 75 basis points. Given the further divergence of monetary policy between the Fed and the Central Bank of China, the renminbi's nominal spread advantage could narrow even more sharply.
"The distinction between nominal and real interest rate differentials must be emphasized here." Wang David, chief economist at Credit Suisse China, told 21st Century Business Herald that nominally, the Sino-US spread is expected to narrow by about 185 basis points. However, against the backdrop of high inflation in the United States and moderate inflation in China, it is not expected that the real interest rate differential between the two may not be very large, or even change in the same direction.
In Wang Qian's view, although the US market has digested the rather aggressive interest rate hikes this year, it is expected that the market price will move towards the scene of a soft landing, that is, the terminal interest rate will exceed 2.5% (and the current pricing is a hard landing situation, the terminal interest rate is below 2%). "This will lead to further rises in short- and long-term yields as the Fed raises interest rates and the market prices higher final interest rates." Wang Qian said.
"The overall interest rate differential between China and the United States is very interesting." Wang Tao explained that the Fed's interest rate hike will naturally push up the US interest rate, but at the same time, the long-term interest rate in the United States has not risen much, because the market believes that with the Fed's interest rate hike, the long-term inflation pressure is decreasing, so the ten-year Treasury yield has not risen much. In addition, in the case of a more turbulent international situation, although the Interest Rate Differential between China and the United States will narrow, it will not show too much contraction.
"Recently, the global situation has been more turbulent, and the performance of the renminbi has been relatively strong, even stronger." Wang Tao said that on the one hand, it is because China's economy is more resilient and has a certain isolation from external shocks. On the other hand, Chinese banks and enterprises have shown a certain sense of risk aversion, and their willingness to exchange foreign exchange is very high.
"Overseas investor demand for Chinese assets should continue to be supported by long-term strategic investors, thanks to better return prospects and diversification of global portfolios, which will continue to increase Chinese assets." Wang Qian went on to say.
Considering that China's policy support will increase, Zhao Yaoting is more optimistic about the profitability of Chinese companies in 2022. China's central bank has recently enacted several measures to ease liquidity, which should provide a strong boost to credit impulses, shifting the economy to an expansionary model, thereby boosting business activity and catalyzing corporate earnings.
He pointed out that in the last quarter, earnings per share of technology stocks have also shown positive growth momentum and momentum. Moreover, as policymakers shift more of their focus toward economic stability and growth, the valuation gap between China's stock market and those of other major markets should begin to narrow.
This issue is edited by Jiang Peipei Intern Zhan Huinan
Millions of readers are watching
Investigate! Well-known e-commerce urgent apologies!
Hot search exploded! ICBC's 250 million deposits are "missing"! Theft or occupation of office?