Dollar Pressures Coming to China

If the People's Bank of China was solely watching domestic indicators, it might desire rate cuts to soften the pain of slowing credit growth. Instead, the Federal Reserve is pressing firmly in the other direction with the European Central Bank set to join in 2019.
iFeng: 央行行长透露重大信号:二三四线城市买房小心了
Today, the Governor of the People's Bank of China, Yi Gang, delivered a speech at the Boao Forum. He said that in China, it is a prudent monetary policy. We do not have any quantitative easing or zero interest rate policy. Now the major central banks are tightening interest rates and starting to withdraw from expansion, they will also shrink. On the table, we have been expecting such a policy for a long time and we are ready for it. The difference in interest rates between China and the United States is within the comfort difference. In the short term, we have been paying close attention to the normalization of monetary policy for a very long time and will continue to prudent monetary policy.

Yi Gang also stated that so far our interest rate liberalization has been moving in a market-led direction and that the price variable has become more and more important. There are currently two channels, one is a benchmark interest rate and the other is a market interest rate. The best way to reform interest rates is to gradually merge two interest rate tracks and integrate them into market interest rates to make these two tracks more cautious.

The number of comments made by Mr. Yi’s speech was very large. He released early the signals of changes in interest rates and financial reforms in China. I only extracted two paragraphs that have an impact on the property market. According to my understanding, the following are included.

1. China is ready to raise the benchmark interest rate, that is, it is ready to raise interest rates at any time. As for when to raise interest rates, it depends on how much the CPI is.

2. China did not engage in quantitative easing monetary policy long ago and began to enter a tight monetary policy.

3. The major developed countries in the US and Europe have all withdrew from the expansion cycle and entered the period for raising interest rates and shrinking the table. We had expected and prepared for the time. Fortunately, this withdrawal process is very slow. We have sufficient time to respond, so we will not We have too much impact and lethality.

4. The interest rate must be reformed. The direction is to develop in a market-oriented direction, rather than the central bank to set a benchmark interest rate. In fact, we have now realized interest rate marketization reforms, such as bank mortgages. The first set of interest rates must be If you go up 10%, 15%, or even 20%, otherwise the bank will not lend to you instead of the benchmark set by the central bank. This means that marketization is playing a leading role, but the effect is still the incremental market, and it has not yet involved the stock market.

China’s decision not to raise interest rates can be said to depend mainly on the only indicator of the price index, that is, whether the CPI has exceeded the critical point of 3 percent, but now it is closely related to the trade war. The trade war still cannot fight, how to fight, how long to fight, and the existence of The variables are also very large. Our soybeans are basically imported. If we really raise the tariffs, it will undoubtedly increase the cost. What used to be used for soybeans, oil extraction, and pig feeding? We used to say that our CPI was abducted by pigs. It is closely linked to the price of pork, so this series of effects may affect the price index.

In March, our CPI dropped again to 2.1%, which is very low. According to this index, there is still a long way from raising interest rates. If it is not real estate that has kidnapped the Chinese economy, if it is not Europe and the United States that exits loose, our exchange rate is under pressure. The PBoC would really like to cut interest rates and the RRR, but cannot.
The CPI is a derivative measure of inflation, it is not actual inflation. It can only cause inflation if a price increase is sustained by credit growth. If soybean prices jump because of tariffs and speculative trading, in the absence of inflationary money and credit, Chinese consumers will spend less on other goods and services. If this were to cause the CPI to hit 3 percent or higher and the PBoC hiked interest rates, it would intensify the deflationary pressure in the economy.

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