If this trend continues, there will be big problems with the currency

Luo sir's words

2024-06-27 19:53Creators in the workplace

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01 This week, the renminbi fell to a seven-month low, domestic equity investment reversed, and the renminbi deposit reserves in Hong Kong increased, intensifying the pressure on the renminbi.

02 Due to the increasing pressure of RMB depreciation, international safe-haven assets are sought after, and the US dollar interest rate is 5 points, which is less than half of the US dollar.

03 At the same time, domestic economic growth is sluggish and real estate depreciation is depreciating, resulting in a run on the RMB.

04 Due to the RMB anchoring of real estate, the exercise of currency anchoring under housing prices is invalid, and a large amount of funds have begun to circulate, which may trigger inflation.

05 Eventually, the solution to the renminbi problem may need to return to consumption, narrow the gap between the rich and the poor, and restore market confidence.

Technical support is provided by Tencent Hybrid Model

This week, the renminbi fell to a seven-month low, while equity investment inflows into the country also reversed.

On top of that, the renminbi deposit reserves in Hong Kong are also growing, and more dangerously, many mainland investors are also taking advantage of the extremely limited offshore investment channels in search of higher yields, which further exacerbates the pressure on the renminbi.

As the pressure of RMB depreciation continues to rise, for a domestic household with assets of 10 million, its currency purchasing power is not only valued at home, but also on the exchange rate against the US dollar.

The key issue now is that not only the dollar, but also gold.

This has led to the international "safe-haven assets" are very sought after, on the other hand, the depreciation pressure of the RMB is very high, the US dollar interest rate is 5 points, the RMB is less than half of the US dollar, which in turn forces high-net-worth families to "vote with their feet".

Combined with sluggish domestic economic growth and the depreciation of real estate, the pressure on the renminbi is unprecedented in the absence of better investment channels.

The market's patience is running out.

The Shanghai Stock Exchange's composite stock index rose 20 percent this year from early February to mid-May, but has fallen 6 percent since then.

Foreign investors who returned to the domestic market in February also began to turn into sellers this month, withdrawing a total of 33 billion yuan through Stock Connect.

Domestic investors have also injected 129 billion yuan into Hong Kong through the Hong Kong Stock Connect, and almost all the funds are going out.

With the influx of domestic funds into the Hong Kong market, renminbi deposits in Hong Kong also reached record levels, with data in April showing that renminbi deposits in Hong Kong stood at 1.09 trillion yuan, close to the highest level in January 2022.

Domestic deposits are also not encouraging.

In the first five months of this year, domestic renminbi deposits increased by 9 trillion yuan.

What's more, more than 80 percent of all new household deposits in the country are fixed.

Money is kept in the bank on a regular basis, which means that people will not easily convert this money into consumption if it is not a big emergency, which to a large extent can also explain why the market reaction to the series of favorable measures for real estate and consumption this year is not strong.

From 2020 to January 2024, Chinese households put about 58.24 trillion yuan into their bank accounts, an average of 14.5 trillion yuan per year, and 82% of them were fixed deposits, which is equivalent to the total amount of new deposits in the four years from 2009 to 2019 combined.

The domestic consumption environment has undergone historic changes, and the pressure on the RMB is very great.

At the end of May, the balance of domestic and foreign currency deposits in mainland China was 299.18 trillion yuan, up 6.5% year-on-year, and the balance of RMB deposits at the end of the month was 293.26 trillion yuan, up 6.7% year-on-year.

The purpose of stimulating consumption is to hope that these deposits will become houses, and then become local income, but the problem now is that when real estate is declining and housing prices are falling, houses can no longer support the effect of asset appreciation and preservation, which leads to more deposits abroad to pursue higher interest rates.

The balance of 293 trillion yuan deposits, according to the current exchange rate, is almost 40 trillion US dollars, which is ten times the foreign exchange reserves, 3 trillion foreign exchange reserves not only have US dollars, but also large amounts of Hong Kong dollars and rubles.

If there is more uncertainty in the market, the renminbi will face a run on the currency, and even under the current foreign exchange control, the renminbi's exchange rate is still very dangerous.

If we add the rising tariff barriers in Europe and the United States, our channels for earning foreign exchange are obviously not as easy as in the past, and if we continue to develop according to this trend, we will not rule out the situation of "dollar shortage".

Therefore, the trade friction at this stage is far from just a difference in production capacity, for us, the European and American markets are not just a trade surplus, but more importantly, to earn foreign exchange to stabilize the domestic RMB exchange rate.

With the widening of the interest rate gap between China and the United States, this money can neither be allowed to flee and exchange for dollars, nor can it be fixed in the bank to eat interest, so the best way is still to lock it in the "reinforced concrete" of the house, and only real estate can support the huge money stock of the mainland.

In addition to stimulating the property market to fix this money, we are also seeing some other trends. For example, the freezing of bank cards, limits, and the need for proof of withdrawals, etc., seem to be more related to wire fraud, but more of them are aimed at "underground banks", avoiding all the possibility of knocking, so that capital flight must pass through the monitored banking system, but it cannot completely block foreign exchange exchanges, otherwise it will cause the opposite effect.

Ultra-long-term government bonds are also a good solution. Attract market funds to buy treasury bonds at higher interest rates, and thus complete the transfer of wealth.

In essence, wealth is growing, so the additional issuance of currency can appropriately stimulate the economy and consumption, and the release of water is not a complete "demonization", but has its positive significance.

But our problem may also be that the water has been released to the point where the water has overflowed the golden mountain.

Or take a loan to buy a house as an example, ordinary families spend half of their life savings to borrow for 30 years to buy a house, but for the bank, it is equivalent to completing the full purchase of a house in advance, and collecting all the savings of a family to buy a house in advance, so they print all this part of the loan by printing money to stimulate economic growth, which is the so-called leverage.

This also has the saying that real estate is a reservoir of currency, when the renminbi is anchored to real estate, both prosperity and loss, which is based on the fact that there are no problems with currency or real estate.

But now that house prices are starting to decline, once the concept of real estate appreciation and preservation is completely lost, then a large amount of money will begin to appear in the market, which will cause inflation, but this is obviously theoretical.

The changes in the macro economy determine whether people save money or consume. In the past, real estate was a reservoir of money and an anchor of money, but as more and more people began to sell their properties and deposit their money in banks, now the anchor of money has begun to fail, and a large amount of cash lying in the bank has become illiquid capital, which not only affects economic growth and people's employment, but also has caused unprecedented pressure on the banking industry.

Banks have printed out the money that people have borrowed for 30 years in advance, but people's real loans have not been paid off, and under various pressures, consumption downgrade has become a general trend.

As you can see from the chart, we have used large-scale leverage during the coronavirus, but unlike the United States, we have focused more on corporate tax cuts and refunds than on U.S. national cash payments, which may have indirectly contributed to the fact that we have not come out of the consumption slump during the pandemic to this day.

In the United States, there is expected inflation, that is, "overheated consumption".

For us, various pressures have begun to come to the fore with the downgrade of consumption, and the financial risks caused by real estate, currency interest rate differentials, and lower exchange rates have become far more problematic than during the new coronavirus period.

It is very difficult to solve this series of structural problems.

At this time, to stimulate consumption, it is necessary to either target the majority of the group with universal cash or adopt higher taxes for a small number of wealthy groups, but neither model is necessarily desirable.

The first is to impose more taxes on high-income groups, which are already at risk of capital spillover due to the reduction of the RMB depreciation interest rate, and if higher taxes are imposed on high-income groups at this time, it may become the last straw that overwhelms these groups, exacerbating their uncertainty and insecurity.

In addition, for most of the low- and middle-income groups, the discovery of gold, which itself is a leveraged measure, the actual effect is not only doubtful, but more importantly, in today's general market downturn, even if it is the discovery of gold, can the market players restore consumer confidence?

It's all about great uncertainty.

The internationalization of the renminbi is certainly a very good path to divide the pressure of the renminbi with the help of the world, but in view of today's problems, the road to internationalization is still very far away.

If you want to internationalize the currency, the first premise is what is behind the currency, not the currency itself, and it is unrealistic to talk about the internationalization of the renminbi without breaking the impossible triangle.

Eventually, the question may come back to consumption, and why don't people spend when household savings are at record highs?

When a small number of people hold a large amount of wealth, but the majority of people have no wealth or even debts, it is difficult for a few people to leverage the employment base of 1.4 billion people on consumption.

When employment becomes severe, income growth slows or even stagnates, people have less confidence in consumption, and the downgrade in consumption is becoming more and more solidified, and this trend is intensifying after three years of the coronavirus, which is the biggest crisis for us.

Perhaps the think tank itself did not think about why an economy that is so resilient would become so fragile because of the new crown virus for only three years.

But if you look back at history, you will know that in the face of the three traditional mountains, people's resilience will not get stronger and stronger, but only weaker and weaker, until they encounter a black swan event, and they will never recover, and it will be difficult to go back to the past.

end.

Author: Luo sir, concerned about the economy, society and everything in our world, curious about the logic behind the development of things, optimistic pessimist.

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