Wen\ Sheng Songcheng, Joe forever
The possible trends of China's financial market and monetary policy in the second half of this year, we believe, can be summarized in two sentences: market interest rates are smooth and downward, and liquidity is slowing down.
“The market interest rate is smooth down†has two main meanings. First, interest rates generally will not continue to rise in the second half of the year, but will be relatively stable or even slightly downward. Second, the short-term fluctuations in interest rates will be smaller than in the first half. The first half of the market interest rate is characterized by large-term volatility and the interest rate level continues to rise. At the Caixin Summit in early December last year, we put forward two points. One is to stabilize the RMB exchange rate expectation. The other is that if conditions permit and at the right time, China can also consider raising interest rates. This mainly refers to the financial market interest rate. Rise. This view has caused a big response from the market. The following facts prove that China's market interest rate has increased significantly in the past six months. The 10-year government bond interest rate is currently around 3.5%, which has increased by 0.6 percentage points over the same period last year. The weighted average interest rate of interbank borrowing in May was 2.88%, and the weighted average interest rate of pledged repo was 2.92%, which was 0.78 and 0.86 percentage points higher than the same period of the previous year.
The main implication of "liquidity is slowing down" is that market liquidity may still be in a tight balance in the second half of the year, and it will not be significantly loosened, but it will not tighten any more, but will ease. In fact, liquidity in the first half of the year was relatively tight. An intuitive reflection was that the broad money supply M2 grew at a rate of only 9.6% in May, and has fallen to an all-time low.
The reason why we conclude that the market interest rate is smooth and the liquidity is slowing down in the second half of the year is mainly based on the following six reasons.
First, China’s economy is hard to enter a new growth cycle. In 2016, China's GDP grew at a rate of 6.7% year-on-year, with 6.8% in the fourth quarter. In the first quarter of this year, the GDP growth rate reached 6.9%, but it is difficult to reach 6.9% in the second half of the year, which may be lower because the Chinese economy has not really found a new growth point.
In May, the national fixed asset investment accumulated a year-on-year growth rate of 8.6%, down 0.3 percentage points from the first four months of this year. Moreover, from the perspective of investment structure, real estate investment has increased by 8.8% year-on-year, which is an important driving factor for investment growth; private investment has increased by 6.8% year-on-year, down 0.1 percentage point from January to April; manufacturing investment has accumulated a year-on-year growth rate of 5.1. %. In addition, after PMI surged to 51.8, the PMI in May was 51.2, which was the same as last month; the industrial growth trend was similar. The growth rate of industrial added value above designated size was 6.5%, which was the same as that in April, but significantly lower than that. 7.6% in March. Of course, the growth rate of imports and exports in May was still 15 percentage points higher than that of the same period of last year, of which the growth rate of exports was 8.7%, and the growth rate of imports was 14.8%, but it has dropped compared with the growth rate in March ( Imports in March increased by 20.3% year-on-year, and exports increased by 16.4% year-on-year. Therefore, we cannot be too optimistic about the economic growth in the second half of the year.
Second, the price level tends to fall. The CPI rebounded slightly to 1.6% after the sudden drop at the beginning of the year, but it is still far below the target of 3% set at the beginning of the year; the year-on-year growth rate of food prices has been negative for 4 consecutive months, and the growth rate of non-food prices is also around 2%. . The PPI turned down from March, with a cumulative year-on-year increase of 5.5% in May, 0.9 percentage points lower than April, and the PPI growth rate has been negative for two consecutive months.
Third, financial risks, squeeze bubbles, and de-leverage have seen initial results. In May, M2 year-on-year growth rate was only 9.6%, 0.9 percentage points lower than the end of last month, and it was at a historical low. This is mainly the result of the downward leverage in the financial system. At the end of May, the M2 held by the financial system only increased by 0.7%, which was 8.9 percentage points lower than the overall M2 growth rate; the non-financial sector held M2 growth of 10.5%, which was 0.9 percentage points higher than the overall M2 growth rate. The excess reserve ratio of deposit-based financial institutions is currently only 1.3%, which is at a historical low, indicating that the liquidity of the banking system is relatively tight.
Fourth, the RMB exchange rate has stabilized and foreign exchange reserves have increased slightly. At present, the exchange rate of the RMB against the US dollar is stable at around 6.8, and the one-way depreciation expectation has basically reversed. At the end of May, the balance of foreign exchange reserves recovered to 305.37 billion US dollars, and the chain continued to increase by 24 billion US dollars, which has risen for four consecutive months.
Fifth, the rise in China’s market interest rate in the past six months has essentially preceded the Fed’s interest rate hike. In March of this year, the Federal Reserve announced a rate hike, and the federal funds target rate was raised by 25 basis points to 0.75%-1.00%. In fact, the People's Bank of China at the end of January, early February, the medium-term loan facilitation (MLF) and the central bank reverse repurchase operation, the benchmark interest rate rose 10BP, followed by the three interest rates on March 16 again increased by 10BP. In March, after the Fed raised interest rates, the People's Bank of China also raised market interest rates. But this time in mid-June, the Fed raised interest rates again, while the PBOC still maintained the open market operating rate unchanged, and the market reaction was stable. It can be seen that the Fed’s interest rate hike has limited impact on China. Even if the Fed raises interest rates again in the second half of this year, it will not mean that the People’s Bank will raise interest rates.
Sixth, the People's Bank of China will not shrink like the Fed. During the international financial crisis, the Fed put a lot of base money through four rounds of quantitative easing policy. The size of the Fed’s balance sheet expanded from less than 900 billion US dollars in 2007 to 4.5 trillion US dollars in 2014, and expanded five times. The central bank’s balance sheet has expanded less than twice. Moreover, in the same period, China's economic growth rate averaged 9.5%, much higher than the US's 1.2%. China's currency growth rate is naturally higher than the United States. As the US economy stabilizes, it is natural for the US interest rate hike and the Fed's balance sheet to shrink, and China's central bank does not have the problem of shrinking the table.
Based on the above analysis, our preliminary judgment is that China will still implement a stable and neutral monetary policy in the second half of the year, but monetary policy should not be tighter. Market interest rates may be relatively stable and have a downward trend, and market liquidity may be slowing down.
Author: Shengsong Cheng counselor for the People's Bank of China, Industrial Research guest researcher; Joe is always Industrial Bank 601166, Shares, chief strategist; solemnly declare: This article reflects only the author's research and academic point of view, does not represent the views of the institutions worked
The central bank suspends open market operations for four consecutive days
The central bank announced that the fiscal expenditures near the end of the month increased, and the liquidity of the banking system after the hedging of the central bank's reverse repurchase was at a relatively high level. On June 28, the open market operation was not carried out. This is the central bank’s suspension of open market operations for four consecutive days.
Encountered "fake June"? Policy has never turned to tight
“I feel that I have encountered a fake June!†The half-year final exam is just around the corner. The market funds face is a loose scene. The money market interest rate continues to fall, and the central bank continues to implement a net return. It still does not hinder the market's optimistic expectation of liquidity and continue to ferment. For many market players, this is probably the most relaxed June in recent years.
When the liquidity is tight, the funds have passed the fabric will be smooth across the season.
Since June 21, the central bank has achieved a net withdrawal of funds for five consecutive trading days, amounting to 40 billion, 80 billion, 50 billion, 50 billion and 10 billion yuan respectively, indicating that the current liquidity is relatively abundant.
(Editor: Ji Liya HN003)
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