I always feel that the central bank has to make big moves
The linkage between money and finance is getting closer and closer!
Yesterday, the Ministry of Finance also mentioned "supporting the central bank to gradually increase the purchase and sale of treasury bonds in open market operations", the details of which are shown in the following chart:
This, combined with the recent resolute speculation of investors in spite of the central bank's warnings, has pushed the 10-year Treasury yield to a record low.
This immediately reminded me that our monetary policy may be about to change: the top management is paving the way for the future unconventional monetary policy of the central bank.
Perhaps this year's Third Plenary Session will reveal some information.
Why?
Because the central bank did not cut interest rates at all in April, and even withdrew bank funds through MLF, which would have suppressed the bond market, but the treasury bond market is still in a bull market.
What does this mean?
It shows that the market is spontaneously cutting interest rates!!
The market is spontaneously cutting interest rates!!
The market is spontaneously cutting interest rates!!
The 10-year Treasury yield has fallen sharply again, indicating that wealthy people are willing to lend their money to the state at a very low return.
In addition, the SHIBOR interest rate has been declining, and the longer the maturity, the faster the decline will be, indicating that banks and other financial institutions have become very cheap to borrow money from each other.
Reminiscent of the fact that since January last year, many banks have been calling to ask if they want to take out loans, and the interest rates they give are also very low.
So far, the yield on 10-year Treasury bonds is much lower than the 5-year LPR and lower than the central bank's MLF rate, and it is much cheaper for banks to borrow money from the market than from the central bank.
As a result, the central bank's ability to regulate the economy through conventional monetary policy will only become weaker.
To understand this sentence, we must first understand what is the difference between conventional monetary policy and unconventional monetary policy.
In a nutshell, the conventional monetary policy is that the central bank does business with the banks and regulates the economy through interest rates.
The process is as follows: the central bank first adjusts the lending interest rate to the bank (mainly the short-term interest rate, such as DR007, MLF), and then under the arbitrage activity of the market, the bank adjusts the lending interest rate to enterprises and residents, thus affecting investment and consumption.
The unconventional monetary policy is that the central bank bypasses the banks, directly participates in the market, does business with market players, and regulates the economy by affecting the return on assets, such as buying government bonds, MBS, and stocks of a listed company in Europe, the United States, and Japan.
The market is separated from the central bank's spontaneous interest rate cut, and the central bank must respond!
How will it respond?
There is only one option in the short term, and that is to follow the trend and cut interest rates!
The reason why there has been no interest rate cut recently is simply because the current situation is complex and rigid.
If the interest rate is cut, then it will be clear that telling the market that the interest rate will continue to go down, which will add another fire to the treasury bond market, which is not conducive to cracking down on the idling of funds.
At the same time, because the U.S. fiscal spends money heavily, U.S. inflation can't go down, delaying the Fed's interest rate cut, and the RMB exchange rate is crumbling above 7.2. If we cut interest rates and people further postpone interest rate cuts, the RMB will not be able to stand it.
Therefore, the central bank has only chosen to wait and see and manage expectations for the time being.
In the view of the central bank, the decline in the yield of 10-year treasury bonds is caused by the idling of funds, and the market has overreacted, and the central bank believes that the economy is improving, long-term yields will turn around, and inflation will bottom out.
Therefore, the central bank's monetary policy implementation report in the first quarter mentioned that "we should pay attention to changes in long-term yields", and the central bank "emphasized the need to prevent interest rates from being too low and leading to intensified involution competition", etc., are all paving the way for no interest rate cuts.
However, we must be clear in our hearts: whether interest rates will continue to fall is up to the quality of the economy, and when the economy is under pressure, interest rates will go down.
Nowadays, the market's spontaneous interest rate cut is forcing the central bank to cut interest rates.
The market believes that the current interest rate is too high.
From the bank's point of view, we are in the stage of debt liquidation (deleveraging), and the two big borrowers, local governments and developers, occupy half of the country, and some are not allowed to borrow, and some are unable to borrow. There are fewer high-quality lenders, and banks still have to operate and make money, so they have no choice but to lower the deposit interest rate and loan interest rate at the same time.
Therefore, as long as the above situation remains unchanged, although the central bank is reluctant to cut interest rates, it is still a high probability event to find an opportunity to cut interest rates this year.
One last word:
Although the trend of interest rate cuts supports the treasury bond market, don't underestimate the central bank's ability to manage the idling of funds, and beware of bond market risks!
In the long run, the central bank can only find a new lever - unconventional monetary policy (standard QE).
You know, as long as inefficient production cannot be cleared, yields will fall, and sooner or later the interest rate tools to regulate the economy will be exhausted.
Now that the market has cut interest rates spontaneously, and the fact that interest rates are falling so fast, it is a hint that the interest rate of conventional monetary policy must be lowered.
Today, our interest rate tool remains at 1.8% (measured by DR007), which is logically another drop in line with market expectations.
This is one step closer to 0.
How the interest rate is close to 0 and the central bank can continue to regulate the economy will inevitably become a problem that the central bank must consider in the next few years.
There are only two ways to think about it:
One is to use the purchase and sale of government bonds to directly act on fiscal policy to indirectly regulate the economy, similar to QE in Europe and the United States.
One is that central bank digital currencies are fully popularized.
In 2017, the central bank studied how to regulate interest rates when they reached 0 in the article "Zero Lower Limit of Deposit Interest Rates and Negative Interest Rate Transmission Mechanism", which mentioned relying on digital currency.
The original words of the core part are as follows:
Considering that the pilot work of the digital yuan has been done for so long, and the recent high-level mention of increasing the purchase and sale of treasury bonds, it is inevitable that the high-level management is likely to pave the way for the unconventional monetary policy of the central bank in the future.
Although many people are furious when they hear about "the central bank buys treasury bonds", they are very worried that money will be uncontrolled and cause great inflation, but I still rationally remind three sentences:
First, unless the economy has been booming, government bonds will become the main grasp of the central bank's future monetary policy, and no one can stop it.
Second, we don't have the conditions to start QE directly, and there is still time for improvement.
Third, in the end, there is a big difference between whether we adopt the American version of QE or the Japanese version of QE. The former is the central bank's secondary market to buy and sell treasury bonds, and the latter can buy and sell treasury bonds in the primary market. If it's the former, it's better, if it's the latter, it's all about discipline...
In short, the market's spontaneous interest rate cut and the high-level's second emphasis on buying and selling treasury bonds all point in one direction:
Unconventional monetary policy is getting closer and closer!
In the past two years, there have been more and more small essays, and if you don't understand the essence and trend behind the event, the investment will be easily led astray by the news and fall into the pit.
Therefore, it is necessary to increase the ability to interpret and analyze new policies and new situations.
The top priority is to find a reliable circle and find a team that knows how to do it.
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