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Recently, intense discussions on monetary and fiscal policies have attracted widespread attention.
From the perspective of monetary policy, since the beginning of this year, the central bank has implemented three RRR cuts, coupled with tools such as the Medium Term Lending Facility (MLF), which have already placed medium and long-term liquidity of about 2.8 trillion yuan, far exceeding the total of 1.76 trillion yuan last year. sum. In the second quarter of the Central Bank's Monetary Policy Committee, the liquidity target will be changed from “reasonable stability” to “reasonable abundance”. In this context, the funds in the interbank market continued to be loose this year, and the money market interest rate fell to a new low in recent years.
However, the performance of financial data is not satisfactory, and the growth rate of M2 and social financing is low or even deviating. At the end of June this year, M2 increased by 8.0% year-on-year, and the growth rate dropped by 0.3 percentage points from May, hitting a record low. In June, the increase in the scale of new social financing was 1.18 trillion yuan, a year-on-year increase of nearly 600 billion yuan. From the first half of the year, from January to June, the cumulative increase in social financing scale was 9.1 trillion yuan, 2.03 trillion yuan less than the same period of the previous year.
Chen Jianheng, a fixed-income analyst of CICC, referred to the above liquidity pattern as “generalized tightness and narrow sense of looseness”, that is, strict supervision led to a decrease in the financial institutions’ investment, and the derivation of deposits was correspondingly reduced, and the generalized liquidity gradually tightened, but At the same time, monetary policy margins have become looser, narrower liquidity has improved, and money market interest rates have begun to fall from the highs at the beginning of the year. He also said that in the strict regulatory environment, the looseness of narrow liquidity is difficult to transfer to generalized liquidity. Because the current financial strict regulatory policies have led to a general decline in financial institutions' risk appetite, and this risk appetite declines, it is not a simple central bank to increase liquidity and increase credit lines can be resolved.
"The continuation of the generalized liquidity and the narrowness of the narrow liquidity means that relying on the stimulation of traditional monetary policy will not help to improve the current situation of risk appetite under strict supervision." Chen Jianheng said.
Hard for "Broad money" to solve "tight credit"The PBoC doesn't want to solve tight liquidity with easy money because the PBoC doesn't want to blow another credit bubble or destroy the currency. Better for the government to use fiscal policy for support.
Regarding the downturn in social financing, it is clear that the new regulations on assets control strictly restrict the business of providing credit for “shadow banking”, non-standard financing continues to decline, net financing is negative for several months, and social financing growth rate also declines. Monetary policy continued to exert momentum, and M2 remained basically stable. "Overall, the new regulations for asset management are blocking the door, and non-standard financing has fallen sharply, but the main entrance is difficult to open. Although the increase in new RMB loans has increased, it is difficult to stop the decline in social financing." Ming said.
It is clear that the marginal monetary policy tends to be loose, and the mid-stream financial system may be able to transfer liquidity to the real economy because of the reduced risk appetite. This is the current situation that “wide currency” cannot solve the “tight credit” structural problem.
"The more generalized liquidity is tightened, the more it is hedged by the looseness of narrow liquidity. The result can only lead to further differentiation of liquidity, drought and drought, and sudden death." Chen Jianheng said that the financial system risk appetite The problem of decline, relying solely on the individual policies of one or two ministries, has a limited role. It is imperative that the first thing to stabilize the money growth rate or even the money growth rate depends on a more active fiscal policy and a modest adjustment of financial supervision.
There is ample room for fiscal policyRegulators can also ease their deleveraging efforts. The PBoC says tight regulations are causing the contraction in credit, not monetary policy.
From the perspective of public revenue and expenditure, as of the second quarter of 2018, the national public finance revenue increased by 10.6% year-on-year, while the national public finance expenditure increased by 7.8%. From the perspective of the deficit rate, the fiscal deficit rate in 2018 is 2.6%, which is less than the 3% deficit rate in the previous two years.
"So whether it is from the first half of this year, the growth rate of public finance revenue is higher than public finance expenditure, or the reduction of the deficit rate in 2018, there is still much room for fiscal policy to exert force," Ming said.
Chen Jianheng said that the growth rate of fiscal revenue in the first half of the year was still higher than the economic and monetary growth rate, and the growth rate of fiscal expenditure was also slow. It was the slowest year in recent years, which led to an increase in the growth rate of fiscal deposits in the first half of the year. Thus crowding corporate deposits. In the second half of the year, if the growth rate of fiscal expenditures accelerates and the strength of revitalizing stocks is increased, then the expenditure on fiscal deposits will help the recovery of corporate deposits, and fiscal expenditures will also provide a certain source of physical profits, alleviating the impact of deleveraging. .
Judging from the national public finance income structure, the central government's fiscal revenue in the first half of 2018 accounted for 48% of the national public finance revenue, the highest proportion in the past five years. From the perspective of the national public finance expenditure structure, the central government's fiscal expenditure accounted for 14% of the national public finance expenditure in the first half of 2018, and the ratio has remained at 15% for a long time since 2010. It is clear that the central government's fiscal revenue is higher, but the central government's fiscal expenditure is gradually decreasing. This shows that the current fiscal structure is lacking in balance, and the local financial power and power mismatch still exist.
Regulatory policies should grasp the strength and rhythm
From the latest data, credit volume is still insufficient to support the decline in off-balance-sheet business and the drag on social financing. It is clearly emphasized that it is necessary to be alert to the impact of regulatory over-contracting business on the overall economy. At this time, the intensity and pace of supervision are particularly important.
Chen Jianheng further stated that the intensity of financial regulation tightening can also be moderately adjusted. Especially after the new regulations for asset management, new financial regulations with more details are also attracting attention. Bank financing is waiting for the details to be put in order to fully cope with and rectify. However, the financial rules should not be too strict, otherwise the bank's risk appetite will be difficult to suppress, which will make the financing of SMEs more difficult and structural contradictions difficult to alleviate.
Recently, the market is paying more and more attention to new financial regulations. As the wealth management products have reached a huge scale of about 30 trillion yuan, the new regulations will have certain impact on themselves and on the market; in addition, considering the current trade war is constantly fermenting, the economic operation data is not optimistic, and the bond market default is expected. New domestic financial management regulations have been postponed.
As a new type of direct financing, wealth management provides clients with funds through financing, non-standard credit, equity, etc., and contributes to the development of the real economy. However, after the introduction of the new regulations on asset management, due to the lack of guidelines for supporting the rules, the issuance and withdrawal of some of the wealth management business of commercial banks were suppressed. At the same time, the suspension of the new regulations triggered multiple speculations in the market, and some businesses could not be carried out as expected.
"Therefore, whether it is from the perspective of financial support for the real economy, or from the perspective of guiding market expectations, new financial regulations should be introduced as soon as possible." Ming Ming said.
More importantly, the spread between onshore and offshore continued to widen as the exchange rate of the RMB against the US dollar accelerated. It once expanded by nearly 400 points. The continued widening of the exchange rate spread between the two sides of the strait indicates that the current RMB depreciation is expected to be strong. At present, more and more people believe that the probability of the RMB exchange rate against the US dollar breaking 7 is greater during the year.
Three major pressures on the renminbiIn late 2015/earliy 2016 China boosted credit growth and CNY kept falling as depreciation expectations were rising amid a U.S. dollar rally. Outflows ceased and inflows (along with appreciation of reserve assets in USD) resumed as the U.S. dollar peaked and reversed.
In the future, if the RMB exchange rate continues to accelerate its depreciation, the market's depreciation expectation will continue to deteriorate, and the central bank will also intervene in a timely manner with great probability . On the other hand, considering the news of the increase in credit release released by the central bank and the Banking Regulatory Commission yesterday, the “wide currency + tight credit” policy portfolio turned to “wide currency + wide credit”, credit expansion restarted, and the monetary environment will be neutral. Song, China’s monetary policy is increasingly diverging from US monetary policy. In this context, the RMB exchange rate is further under pressure, how will the market and monetary authorities “wrestle”? The uncertainty in the outlook has increased.
Pressure 1: Depreciation expectations strengthenThe PBoC has to defend CNH. It controls CNY, but everyone knows that. CNH is the real price. The IMF explained the CNH's role in a 2012 paper, covered in this post: The Informational Power of the Offshore Yuan Exchange Rate
A common indicator of the market's expectation of the RMB exchange rate trend is the price difference between CNH and CNY.
Guan Tao, a senior researcher at the China Financial Forty Forum, said that judging whether the market is expected to differentiate or not can firstly see that the price difference between CNH and CNY is not big. If it expands, it means that the imbalance between supply and demand is more serious, and the unilateral depreciation is expected to increase. Then see if the deviation of this spread is in one direction and continues in one direction, it is regarded as a unilateral expectation.
In recent days, the spread between CNH and CNY has continued to expand, once expanding by nearly 400 points, and today's spreads have remained above 200 points most of the time. "The foreign exchange difference between the two days is relatively large, because the offshore market is more market-oriented and less regulated, and it is usually more representative of the market's true will." A foreign exchange analyst at Beijing's big bank told reporters.
Pressure 2: the settlement and foreign exchange surplus narrowed by nearly 90%Reserve growth tracks with the direction of DXY. Rising, reserves fall. Falling, reserves rise. It's all USD.
The performance of bank settlement and sales remittances reflecting the willingness of the market to purchase foreign exchange and foreign exchange settlement is also not optimistic. Despite the June data released by the State Administration of Foreign Exchange today, the bank's bank settlement and sales surplus was 13.1 billion yuan, which was the third consecutive month of surplus, but the size of the surplus dropped by nearly 90%. In the same period, the bank's forward net sales of valet was 88.7 billion yuan. The above data shows that since the renminbi entered the rapid depreciation channel in June, the cross-border capital flow situation has also been fine-tuned.
However, before this, due to the overall stabilization of the RMB exchange rate in the first half of the year, the cross-border capital flow situation is improving. Wang Chunying, director of the International Payments Department of the State Administration of Foreign Exchange, said that overall, China’s foreign exchange supply and demand were basically balanced in the first half of the year, the willingness of enterprises to purchase foreign exchange declined, and the situation of foreign exchange financing became more stable. The exchange rate increased, and the market participants’ overall willingness to hold foreign exchange decline.
However, with the entry into June, the exchange rate of the RMB against the US dollar has turned sharply, from the appreciation of the first half of the year to a rapid depreciation, and has all retreated in the first half of the year. Can the cross-border capital flow situation in the second half of the year maintain a good momentum in the first half of the year? It is worth continuing to observe.
Pressure 3: the dollar index trend is expected to differentiateIf the rise in the dollar triggers a disequilibrium in CNY, then CNY could begin fueling a rising USD that in turn weakens CNY. China, and the rest of the world, slides into a currency market crisis.
According to the current pricing mechanism of the central parity of the RMB against the US dollar, the trend of the RMB against the US dollar depends largely on the trend of the US dollar index. That is, the US dollar is stronger and the RMB is weaker. The US dollar is weaker and the RMB is stronger. Therefore, the future trend of the US dollar index is crucial to the impact of the RMB exchange rate.
In this regard, Guan Tao said that it is still difficult to judge. There are different opinions on the market now. At present, the factors supporting the strength of the US dollar are the ones. First, the progress of the normalization of US monetary policy is relatively advanced. However, the interest rate level in the United States is now 1.75%, close to normal levels, and the rate hike is expected to come to an end. The spread between the US two-year and ten-year Treasury yield levels has gradually flattened, and there is a view that the economic cycle is nearing completion.
The second factor comes from other markets such as Europe. Because foreign exchange is a price relationship between one currency and another, the dollar was weak last year, mainly because the European economy exceeded expectations. However, since the beginning of this year, the European economy has not been particularly ideal. At the same time, political instability in Italy and Spain has occurred, and the euro has fallen more. The future does not know whether the European economy will resume its upswing, and whether the political turmoil in Europe can be alleviated.
As Cheng Tao said, the current market is not divided into the pre-judgment of the trend of the US dollar index. However, precisely because of the expected differentiation of the US dollar trend, there is also a view that the exchange rate of the RMB against the US dollar will fluctuate in both directions in the future, but the fluctuation will increase.
Enterprises should do the exchange rate hedging in time to avoid the exchange rate "streaking"The government says all is well. The exchange rate is stable.
Based on the current market view, everyone is different on the expected trend of the US dollar, and thus has different views on the RMB exchange rate. However, the current voice of further depreciation is more mainstream.
However, given the increasing complexity of domestic and foreign factors affecting the exchange rate trend, the uncertainty of the RMB exchange rate trend is also increasing. Therefore, from a more pragmatic point of view, the more rational insurance approach for import and export companies is to do a good job of hedging the exchange rate, rather than unilateral depreciation or appreciation of the exchange rate. In particular, those short-selling forces that gamble on the unilateral depreciation of the renminbi have witnessed the series of operations of the central bank after the "811" exchange rate reform. It should be known that the power of the exchange rate management policy in the hands of the monetary authorities should not be underestimated.
Guo Shuqing, chairman of the China Insurance Regulatory Commission, said recently that the RMB exchange rate has adjusted to a reasonable range of two-way fluctuations since last year's adjustment. The economic fundamentals determine that there is no possibility of a significant depreciation. As a new international reserve currency, the future of the renminbi will tend to strengthen overall. In the past 30 years, residents and enterprises that have seen the renminbi, snapped up and held foreign exchange for a long time have suffered great losses. In recent years, some international speculators have tried to make a huge profit by shorting the renminbi. It turns out that they have seriously misjudged the situation.
In addition, as the vice president of the central bank, Pan Gong, said, in the context of increased exchange rate volatility, market players should establish a financial neutral concept. In the past two years, after the education and baptism of the market, the awareness of Chinese companies' risk aversion has improved, but overall the risk aversion is not strong. The “streaking” behavior of enterprises in the foreign exchange market is not only macroscopically due to the herd effect of market entities, but also easily causes market resonance, and at the micro level, enterprises face large exchange rate risk exposure. Therefore, with the marketization of the exchange rate formation mechanism, the volatility of the exchange rate is gradually increasing. The foreign exchange management of enterprises should adhere to the principle of serving the main business and adhere to the financial neutrality. Use the tools of the foreign exchange market to carry out hedging and reduce the bet on the unilateral increase in value.
Foreign exchange bureau: maintaining the stability of the foreign exchange market and ensuring the safety of foreign reservesIn a crisis, China will be faced with a choice. Defending the exchange rate could risk exhausting its reserves. It is at that moment that the odds of a large one-off depreciation will soar.
For the next step of cross-border capital flow, Wang Chunying admits that he is very concerned about Sino-US trade frictions, and the future evolution needs to be continuously observed. However, in the past few years, the SAFE has further accumulated management experience in responding to external pressures and enriched policy tools. In the future, we will continue to adhere to the general tone of steady progress:
On the one hand, deepen the reform of foreign exchange management and promote the two-way opening of financial markets. On the other hand, safeguarding the stability of the foreign exchange market, preventing the risk of cross-border capital flows, ensuring the security, flow, value preservation and value-added of foreign exchange reserves, and safeguarding national economic and financial security.
Wang Chunying emphasized that in general, the economic fundamentals and policy fundamentals closely related to the operation of China's foreign exchange market are still stable, and China's cross-border capital flows and foreign exchange market operations are generally stable.
The relevant part of the podcast starts at 24:00. The five prongs Bannon refers to:
1. Take China off the banking system or limit their access to capital markets - too much of a blunt instrument
2. Scale of the tariffs – half a trillion dollars
3. Section 301 investigations – no more forced technology transfers through joint ventures
4. Executive actions on ZTE – “There's 50 ZTEs. You could liquidate all of them in 30 days.”
5. Proposal to ban investment in sensitive US technologies by companies with 25% Chinese ownership – limiting Chinese access to technology
"If we were to go full on and pull the trigger on that, and converge those all in a point, you bring 'em to their knees right now."
Is Trump Setting Up The Fed As The Fall Guy?Smoot-Hawley did not cause the Great Depression. Rampant credit growth caused the depression. Trump's trade policies orders of magnitude smaller than quantitative tightening, in both economic and financial market impact.
CNBC’s Steve Liesman raises an interesting question: is Trump setting up the Fed to take the fall for his trade policies gone bad? Farmers are really starting to feel the pain.
China doesn't care about anything in this NYTimes editorial board ghostwritten piece. What it is concerned about is what is not mentioned at all: trade policy.April 2016: Steel Trade War Is Glimpse of Future: Great Political Changes Underway
China is in a similar position as the USA in 1929, but worse. China has a larger credit bubble, with more overcapacity and a far greater reliance on trade. More importantly, countries have a security interest in thwarting China's economic rise.
If a President Trump were to renegotiate trade deals, the logic of using trade against China becomes inevitable. As laid out in The Rise of China vs. the Logic of Strategy and as I discussed in The Logic of Strategy: Yuan Devaluation and the Road to Trade War, the idea of limiting China's rise with trade policy already exists. The main actor doesn't even have to be the United States, but Vietnam, Philippines and other nations battling China over the South China Sea among other disputes. These nations cannot use trade policy today without defecting from the global trade system and facing punishment, but if the U.S. defects even a small amount and solely as an economic strategy, the door is opened for other nations to defect as well and make trade policy a component of national security.
In conclusion, the case for countervailing duties is clear. China is by far the largest steel producer and due to its own sclerotic economic policies, increased production by 15 percent since 2013. Now it says the world must share the burden of overproduction, but China can't even make it's own local governments shut down local production. Meanwhile, the rest of the world wants China to absorb all of its own self-inflicted losses. The political climate has changed and I would bet on Donald Trump winning the presidency at this moment, but even if Clinton wins, the U.S. will at least side with the steel makers on this narrow issue. Tariffs are having positive effects in the U.S. Everything is working in favor of a protectionist U.S. policy on steel, which will very likely be replicated across other industries with the implementation of a national economic policy under a President Trump. With a President Clinton, there is likely no change in the free trade orthodoxy and both TPP and TPIP will pass, despite what she says during the campaign. (One reason why I expect Trump will win is that voters will want the sure thing in November on trade.)2017: Second Age of Globalism Ending
Trump has created the coalition I predicted in The Logic of Strategy: Yuan Devaluation and the Road to Trade War
The protectionists are ever so slowly gaining the upper hand thanks in part to negative social mood. 2008-2009 will probably mark the peak moment for Wall Street and the Treasury Department, even though there is as yet no sign of it in Washington. Changes can be seen in the form of issues such as immigration, which has turned the grassroots of the conservative movement against the Chamber of Commerce and large corporations (due to an attack initiated by the latter against the former). This has pushed the Overton window of acceptable debate among conservatives who can now take shots at big business. There is also the growing libertarian faction pulled together by Ron Paul that supports his son, Rand Paul, that consistently attacks the Federal Reserve and Wall Street. Put it together and it is not hard to envision an anti-Wall Street, pro-manufacturing political consensus emerging. This will cut across party lines, with manufacturing unions pulling in Democratic support if there are specific bills to vote on.
Trade Conflict Inevitable
One way or another, China will see the terms of trade changed and it will not be in China's favor. The best way for China to strengthen its position without any negative diplomatic effects: slash overproduction. If China doesn't cut production, it will hold the weak hand because it will bear the entire brunt of a trade war.
As touched upon in The Logic of Strategy: Yuan Devaluation and the Road to Trade War, once trade is subordinated to national security, once free trade orthodoxy is removed and trade becomes negotiable, you will rapidly see a coalition of business, foreign policy, military and security interests which will emerge to support a new trade policy. Countries such as Vietnam will likely jump on board with a policy to slow China's economic growth, and thus its military spending and ability to project power into the South China Sea. If China understood even a hint of what may be coming, they would be rolling tanks into the steel mills.
The Bigger Political Shift
Very few people predicted the rise of Trump, but I laid it out back in 2014. (Immigration Issue Set to Explode in America; Prepare for Political Volatility) Once he rose, experts didn't think he could win. Now the same people think Trump won't win in November. I expect he will win an electoral college landslide because major changes are underway as negative social mood has finally found its political agenda.
I explained the political shift here: Political Revolution Comes to America Via Immigration Issue.
Chinese Access to U.S. Semiconductor Industry May Be CurbedJuly 2018: Logic of Strategy: New Crisis as U.S. Identifies China as #1 Threat
The report, being prepared by President Barack Obama’s chief science adviser and due to be published before he leaves office this month, will include recommendations aimed at bolstering protection of an industry deemed critical to national security, according to people familiar with the study.The logic of this action is not significantly different from the logic of slowing global trade, if one is basing the decision on national security grounds. The more resources China has, the more resources it can apply to a problem. If China is enough of a threat to be denied access to U.S. technology, it's enough of a threat to sacrifice a small amount of American GDP growth to create a larger slowdown in Chinese GDP growth. If China is put on a trajectory of slower growth, it will never catch the United States economy.
China's expansion (and claims of territory) into the South China Sea is driving the logic of strategy. China is pushing many nations towards the United States. Australia, for example, has been more proactive than the U.S. when it comes to regional security. Many economists correctly criticize President Trump for poorly implementing tariffs, offending long-term allies such as Canada and the United Kingdom. (#AnglosphereNow) However, they miss the question of sovereignty for nations such as Australia, Vietnam and the South China Sea nations. The Logic of Strategy argues they should voluntarily slow their GDP growth by reducing trade ties with China, thus also slowing China's growth and its military modernization. The greater goal is protecting national sovereignty.This next article has links to a bunch of earlier articles discussing yuan devaluation, going back to 2011. The Chinese yuan has been showing signs of depreciating back to 2008. Each time deflation breaks out again (2011, 2014, 2018) the yuan depreciates.
Trade is no longer a purely economic issue beholden to free trade ideology, but one component of an overall national security strategy. On the one hand, by blowing up the TPP and shifting U.S. policy, President Trump has made as Pacific alliance less likely, but on the other hand, his direct confrontation with China has advanced the issue. Using Europe as a counterpoint, many NATO allies are upset at President Trump's demand that they increase their military and monetary contributions to NATO. They don't want to increase military spending and don't like that the United States will either reduce its military presence or find other means of extracting monetary support. However, in the Pacific there is a desire for greater security cooperation. The best way for Pacific nations to reduce trade tensions with the United States will be through greater military and financial support for joint security.
What was the chance of becoming an inflection point? First, the private housing rate in China has reached 120% in 2009. A large part of this 120% is the housing reform housing. After the change, it entered the market. That is to say, the average household has reached 120%, while the private housing rate in the world is less than 60%.Whatever the exact number, Chinese buy a lot of speculative and investment properties. Many people, myself included, expected the return of this housing into the market during the prior disinflationary wave would result in tumbling home prices. We were wrong. However, if the situation was bad before, it is much worse now as the proportion of first home purchases collapsed from near 50 percent two year ago to near 30 percent in 2018Q1.
This is not a small number even if only 36 billion. In 2017, individual mortgage lending in Beijing totaled 136.6 billion. That's an increase of 27 percent beyond what was reported. If the real total is higher, the drop off in lending reported at the end of 2017 greatly overstated the slowdown in real estate lending. this helps explain why real estate prices keep zooming ahead despite government regulations.Beijing is also one of the more tightly regulated local housing markets.
Data from the Chinese central bank payments system indicates that as of the end of the first quarter of 2018 a total of 612 million credit cards had been issued in China, for an average of 0.44 per person.Not all of that went into housing, but with credit tight, no doubt some substantial portion made its way into speculative and investment home purchases.
13.14 trillion yuan in credit had been extended via credit cards, for an average of 21,500 yuan per card.
