Whether China will cut interest rates or not is still a big variable in the follow-up progress of Sino-US economic and trade negotiations. Overall, our monetary policy should still focus on moderate tightening and a good balance between economic adjustment structure and monetary policy operation.
Discrimination of Super-expectation Stimulus
Dang Chao, director of the Sino-British International Program at the School of Finance, Zhejiang University of Finance and Economics, told the Securities Times that the rising uncertainty of the global macroeconomic situation and the increasing downward pressure on the economy are the main reasons why central banks have turned to the dove one after another, which provides more policy space for the Central Bank of China, but the so-called over-expectation has increased the stimulus. Its not very likely. He believes that this should be analyzed mainly from several aspects, such as guarding against asset price bubbles, maintaining the stability of the RMB exchange rate and solving the structural problems of the economy.
At its regular meeting in the second quarter of 2019, the Central Bank Monetary Policy Committee held that counter-cyclical adjustment should be implemented in a timely and appropriate manner and macro-policy coordination should be strengthened. Steady monetary policy should be relaxed and moderate. We should keep a good balance between the nominal growth of GDP and the growth of broad money (M2) and social financing. From this point of view, Chinas monetary policy model is more inclined to maintain the stability of interest rates, exchange rates and policy expectations, emphasizing reasonable equilibrium. At least, the unexpected stimulus is not in line with its orientation.
Xie Yaxuan, chief macroeconomic analyst of China Merchants Securities, told the Securities Times in an interview that the central banks monetary policy decision-making is a multi-objective system, which mainly decides whether to adjust monetary policy from the perspective of economic fundamentals such as economic growth and inflationary pressures. One of the key tasks of the central bank in 2019 is to merge interest rates. Therefore, the era of benchmark deposit and loan interest rates as a policy tool has passed. In the future, the central bank will pay more attention to adjusting key interest rates in the open market.
Although the central government does not want to, it cannot rule out the possibility of adjusting the benchmark lending rate. The market operating interest rate is already very low. Continuing to lower (market interest rate) can release a signal function, but the actual effect may not be obvious. Hua Changchun, chief economist of Cathay Taijun Safety Ball, told the Securities Times. According to Choice Financial Terminal, the interest rate in the domestic money market has been at a historic low. On July 2, DR001 in the inter-bank market dropped to 0.7%. DR007 is only around 2.1%. The effect of lowering the operating interest rate in the open market is indeed very limited.
Undoubtedly, deepening the reform of interest rate marketization will become the focus of follow-up policy. Since 2018, Chinas central banks credit policy of directional support for small and private enterprises has been continuously introduced, but this more reflects the quantitative monetary policy tools. From January this year, the weighted average interest rate of loans of financial institutions did not fall but rose, and the liquidity stratification of the market intensified at the end of half a year, the drawbacks of the inadequate quantity transmission channels became increasingly obvious. In this way, price instruments are expected to gradually develop in the field of monetary policy. Mingming, deputy director of CITIC Securities Research Institute, told the Securities Times that through the central banks interest rate reduction in the open market, guiding the LPR downward and ultimately guiding the lending rate downward, will help further reduce the financing costs of enterprises.
Combination Boxing is promising
Xie Yunliang, chief macro-analyst of Minsheng Securities Research Institute, predicts that measures such as a comprehensive reduction in interest rates and a sharp devaluation of the RMB exchange rate will be difficult to see in the short term. Even if the results of the Sino-US economic and trade negotiations are not satisfactory, the landing time for the implementation of large-scale counter-cyclical adjustment measures by the Central Bank of China is probably at the end of 2019. Considering the long-term negative impact of the escalation of trade frictions, we need to reserve some policy space for alleviating the downward pressure of the economy in 2020. Xie Yunliang told the Securities Times reporter.
As we all know, if monetary policy fails to relax, it may solidify the distorted economic structure; if monetary policy fails to tighten, it may also cause the tight repayment of credit and bond markets and increase the difficulty of economic transformation. So, including monetary policy, what kind of macro-policy combination boxing will China adopt?
Mingming believes that since this year, the domestic macro-policy mix can be summarized as stable currency + marginal tight credit + broad fiscal. Broad finance is reflected in reducing taxes and fees, expanding deficits, increasing the issuance quota of local government special bonds, etc. Monetary policy is anchored by credit, moderate and stable, and the strength of broad credit is weakened, mainly by interval regulation.
Party Chao told the Securities Times that Chinas economy needs structural adjustment, but this process needs to be gradual and coordinated, so as to avoid the liquidity shortage caused by market clearance and panic and interfere with normal economic activities. Therefore, monetary policy can play a role in mitigating risks to a certain extent. In his view, Chinas macro-policy is characterized by multi-objective consideration. That is, stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment and stable expectations. Therefore, relevant policies such as monetary, fiscal and industrial policies should serve this series of objectives.
Xie Yaxuan believes that Chinas fiscal policy should be more active, and should adhere to the tax reduction and fee reduction and other ways to reduce the impact of government intervention on economic activities, mobilize the enthusiasm of families and enterprises. Based on the fact that China has high macro leverage and high asset prices, China should aim at stable employment, base on supply side, and underpin rather than boost economic growth. In the policy portfolio, market conjectures such as large-scale infrastructure construction and comprehensive relaxation of real estate policy will not be the first choice of Chinas policy toolbox.
Mingming told reporters that in order to achieve steady growth and low leverage, implement the policy of no speculation in housing and control house prices, it is no longer appropriate for China to transfer leverage through government departments, which means that Chinas economic growth should shift from big government expenditure to enterprise investment and consumption.
Does the RMB exchange rate rise or fall?
From the basic point of view, the general trend of Chinas long-term economic improvement has not changed. As the second largest economy in the world, China still maintains an economic growth rate of more than 6%. In terms of growth potential, China still has a broad space to improve total factor productivity. Undoubtedly, this is the strongest support for the RMB exchange rate. Fan Lei, a macro analyst at Guohai Securities, believes that the easing of trade frictions between China and the United States and the reduction of interest rates by the Federal Reserve during the year mean that the RMB may appreciate slowly and appropriately.
Party Chao told the Securities Times that the fluctuations of the exchange rate market in the past two years have always been the logic behind the evolution of Sino-US trade conflicts. That is to say, the future economic uncertainty and policy uncertainty, once superimposed, may make market expectations worsen in a short period of time. At present, trade conflicts are only eased, and the solution of deep-seated contradictions is bound to be a long-term complex and tortuous process, so the RMB exchange rate will inevitably have twists and turns in this period.
In early and mid May this year, with the repeated Sino-US economic and trade negotiations, the pressure of RMB devaluation increased again. Choice data show that during the 10 trading days from May 6 to 17, the spot exchange rate of Renminbi depreciated by 1772 basis points against the US dollar, and then the US dollar weakened significantly since June 19, with a decline of up to 1 percentage point against the RMB in three trading days. Recently, the RMB exchange rate has been in a steady state.
In this regard, Xie Yaxuan believes that the weakening of the effective exchange rate of the US dollar may lead to the inflow of international capital to emerging economies, including China, thereby improving the supply and demand situation in the corresponding regional foreign exchange market. In terms of the dollar cycle and fundamentals, the dollar index is at the end of its strength, and is more likely to weaken in the future, with the euro, yen and Sterling more likely to strengthen. Under the current RMB exchange rate formation mechanism, the US dollar is weak while the Euro and Yen are strong. From the perspective of reference basket currencies, it will help the RMB exchange rate to recover against the US dollar.
Xie Yunliang told the Securities Times that in late May, with a series of measures taken by the central bank, the RMB exchange rate was stabilized. Generally speaking, the main driving force for the devaluation of the RMB against the US dollar in this region is still market forces rather than policy factors. Since late June, the RMB has rebounded slightly on the basis of the previous depreciation, accompanied by the expected increase in interest rate cuts by the Federal Reserve and the resumption of economic and trade negotiations between China and the United States. Xie Yunliang pointed out that, in the short term, the exchange rate of RMB against the US dollar mainly fluctuates in a small two-way way way. In the long run, Chinas economic development prospects are ahead of the world, and RMB appreciation is a big probability event.
Since the 8.11 exchange rate reform in 2015, strengthening exchange rate flexibility has become a major feature of Chinas exchange rate market-oriented reform. Since the second half of 2018, the RMB exchange rate has fluctuated in two directions. Specifically, in the second half of 2018, due to the warming of Sino-US trade friction, the weakening of domestic fundamentals, and the Federal Reserves shrinkage, there is a certain depreciation pressure on the RMB exchange rate. After 2019, the RMB exchange rate has appreciated in the context of the slowdown of economic growth in the United States, the easing of Sino-US trade relations and the recovery of domestic economy in the first quarter. However, the rising Sino-US trade frictions have also caused the rapid devaluation of the RMB exchange rate.
Specifically, the Federal Reserve has started a cycle of interest rate cuts, or has brought capital inflows to the country, and has supported the RMB exchange rate. However, considering that Chinas economy is still bottoming out, the RMB exchange rate does not have the basis for a substantial and rapid strengthening, and the follow-up may maintain the steady state of the enterprise. On the margin, the RMB exchange rate may appreciate slightly, but the space is relatively limited. Mingming told the Securities Times reporter.
Hua Changchun told reporters that in April this year, when he exchanged with overseas market institutions, the other side generally believed that there was no risk in the RMB exchange rate, but now this trend has begun to turn into worry. At the same time, although the trend of the US dollar may be weak in the future and the decline of interest rate in the US market will exceed that of China, the trend of domestic manufacturing investment in China is not ideal, domestic demand still needs to be further boosted, and we still need to deal with the risk of RMB devaluation.