Global Central Bank Annual Meeting Preview: Taper signal is getting stronger, how is the trend of RMB assets?

21st Century Business Herald reporter Hu Tianjiao reported from Beijing

On August 26, local time, the annual meeting of global central banks will open in Jackson Hole, and global central bankers will gather in front of the computer to discuss the world economic prospects in a virtual form. Investors and traders have set their calendars and are waiting for Fed Chairman Jerome Powell's keynote speech on "Economic Outlook."

Most of the US economic data is back strongly, the taper signal is gradual, and the reduction in the size of the bond purchases is already in the Text of the JULY FOMC Agenda. In the case that the Fed's monetary policy may be adjusted, how to move RMB assets is another core topic in the sensitive market in addition to the Fed taper.

At the same time, the clockwork of regulatory policies in many industries in China is still tightening. Investors have some disagreements about the prospects for renminbi assets.

<h4>RMB volatility will pick up</h4>

As jackson hole, the annual meeting of global central banks, approaches, some Fed governors have tried to provide forward guidance.

With the two governors of the European Central Bank (ECB) and the Bank of England (BOE) not attending this year's meeting, the Fed has captured almost all of the attention of traders around the world, and the market will focus on amplifying any hints about the Fed's timetable for scaling back its Asset Purchase Program (QE).

Fed officials have claimed that they will scale back $12 billion in monthly bond purchases before raising interest rates, and the July FOMC minutes also include a statement that "discusses shrinking bond purchases." Boston Fed Governor Eric Rosengren has repeatedly insisted several times recently that by late September, the employment target will be enough to support the plan to scale back bond purchases.

As the Taper signal rises, Powell's speech is about both whether liquidity continues to decline, as well as volatility in stock markets and commodity prices, which are supported by a lot of liquidity.

"The date of the meeting has been highlighted on the calendar by traders for several months." Matt Weller, head of global research at FOREX, said, "So, at least there is still the possibility that Powell is neutral and the market response is flat. However, many traders will focus on Us Treasury yields first. The short-term two-year Treasury currently yields around 0.23% compared to the 10-year Treasury yield of 1.26%, and any hawkish (up) or dovish (down) surprise at that time could trigger sharp fluctuations in yields. ”

The Fed's rhetoric is one of the biggest uncertainties for the dollar, which temporarily surged to around 93.5 after the release of the minutes of the July FOMC meeting. "After breaking through resistance at 93.30 later last week, the dollar index is currently pulling back. If Powell hints that he will wait until November or later to announce the latest news of the balance sheet reduction plan, the dollar could probe further towards the 50-day moving average near 92.50. Conversely, if Powell signals a more hawkish balance sheet reduction, the dollar index will return above the 93.30 zone and is expected to continue to look up at the September 94.00 mid-zone high in September 2020. Matt Weller said.

On August 20, the dollar strengthened, the same day the Shanghai Composite Index fell more than 1%, the renminbi weakened, and fell below 6.5 again. On August 24, USD/CNY returned below 6.5 again. Even so, Matt Simpson, a senior analyst at GAIN, pointed out that compared with the emerging markets that are not doing well, the trend of the renminbi has been quite strong this year. Emerging-market currencies fell far more than the renminbi. Recently, the exchange rate of the renminbi against the US dollar has fluctuated in the range of 6.45-6.5. We still expect usd/yuan to still fluctuate around the 6.4-6.6 range.

According to SWIFT Watch, the amount of RMB payments in June 2021 increased by 65.51% compared to May 2021, while the amount paid in all currencies increased by 27.78% overall. This was a higher-than-usual month-on-month increase (probably due to increased activity at the end of the second quarter). All currencies, including the renminbi, fell in July. However, it should be noted that the weight of the renminbi in July 2021 is still 31% higher than that in July 2020.

The Office of the Chief Investment Officer (CIO) of UBS Wealth Management expects rmb volatility to pick up as economic growth and monetary policy in China and the United States turn to a fork in the road, especially in the next 3 to 6 months when the Federal Reserve announces details of reducing the size of its bond purchases, and option investors expect the dollar to increase volatility against the renminbi. In the short term, usd/CNY is expected to oscillate in the 6.45-6.60 range. If the DOLLAR continues to show a sideways basic trend against the renminbi, and the dollar appreciates widely against other currencies, the renminbi's nominal effective exchange rate (NEER) may return to its 2015 highs.

Liu Linan, head of macro strategy at Deutsche Bank greater China, pointed out to the 21st Century Business Herald reporter that the US dollar has shown a clear appreciation trend since the end of May, the US dollar index appreciated by about 4.4% last week, and once rushed to the highest point this year, the foreign exchange market dollar against other currencies Valuation correction, the above market performance has reflected part of the expectations of the Fed's monetary policy shift.

"We currently expect the Fed to announce a reduction in asset purchases under quantitative easing in November, with the market generally expected to do so before the end of the year." Liu Linan explained, "If the Fed at the annual meeting of the global central bank in Jackson Hole conveys a signal of policy change that exceeds market expectations, such as accelerating or slowing down the pace of reduction, it will push up the volatility of the RMB exchange rate." ”

But she also mentioned that abnormal fluctuations in the RMB exchange rate can only occur when market expectations deviate significantly from the Fed's opinion.

For the impact of Powell's statement on domestic interest rates, Wu Ziyu, director of Asian fixed income investment at Aberdeen Standard Investment Management, told the 21st Century Business Herald that the domestic interest rate trend is less affected by overseas. The interest rates on government bonds and local bonds are more dependent on domestic factors, such as China's economic trends, policy changes and domestic bond supply and demand.

"Although the ratio of foreign ownership of Chinese government bonds continues to rise, currently exceeding 10%, most of the funds are mainly long-term asset allocation, so overseas risk sentiment has little impact on domestic bonds." He pointed out, "Second, we think the pace of the Fed's reduction of QE should be cautious, and Powell should not be very clear before September to announce a specific QE plan." ”

<h4>Higher long-term risk premium for RMB assets</h4>

For the future trend of RMB assets, the differences between all parties have gradually emerged.

For example, SoftBank's investment in China is slowing, and it is hopeful; Blackrock advises investors to increase their exposure in China, and so on.

However, the general consensus in the market is that the release of regulatory policies in some industries in China since July and the slowdown in economic repair caused by the local epidemic in China have deepened the sensitivity of the market. The impact of the policy has spilled over to the two cities of equity and debt, increasing overseas investors' doubts about the hedging nature of RMB assets and raising the long-term risk premium of RMB assets.

"The recent increased supervision of various industries is very confusing for overseas institutional investors." Liu Ligang, managing director of Citibank's research department and chief China economist, pointed out in an interview with the 21st Century Business Herald reporter, "What's more, some remarks are not issued by regulators, and some media statements also make overseas institutions worried." As a result of these circumstances, Chinese stocks have been oversold overseas, with serious losses and a market value drop of $1.6 trillion. He showed that overseas institutions are now pessimistic about Chinese stocks, and there are great doubts about whether these shares can still be invested.

Liu Jie, head of China macro strategy at Standard Chartered Bank, told 21st Century Business Herald that the regulatory risks of investing in Chinese assets (including offshore market assets) have increased significantly due to China's recent intensive regulatory tightening measures and the statement that it will continue to tighten in the next five years.

"Increasing frequency and intensive regulatory paces, widespread impact on multiple industries, lack of transition periods or arrangement plans, and uncertainty about next policy objectives could expose Chinese assets to higher risk premiums over the long term, leaving these companies at lower valuations than their peers." Liu Jie said.

In Liu Ligang's view, the recovery of confidence will take a long time, and although the risk premium is not permanent, this regulatory storm has hit Chinese stocks hard. After the promulgation of the Foreign Company Accountability Act in the United States, the probability of Chinese stocks delisting from the United States has risen sharply. In addition, the short-term risk aversion brought about by strict supervision will make overseas institutions cautious about Chinese stocks, and the sharp decline and volatility of the stock market will also affect the confidence of domestic investors.

"While investors understand that domestic reforms are necessary and are optimistic about China's medium- and long-term economic growth prospects, current uncertainty remains the primary factor in investors' investment considerations." Liu Jie expects China to introduce more supportive policies to help economic growth in the second half of the year. Markets believe that well-managed, more predictive, more moderate regulatory reforms with a grace period will contribute to long-term economic growth.

Wu Ziyu believes that when the market encounters unexpected events or new policies, it will generally react too much, which is a normal state of the investment market.

"Judging by the volatility in the stock market recently, we feel that the risk premium has indeed reached a high level. In a short period of time, investors first need to understand the impact of the new policy on profit margins in more detail, and judge whether there are more policies that have an impact on the profit margins of the industry. Wu Ziyu said.

In fact, under any system, every country with a plan for long-term development must balance the interests of capital and the needs of the social level. "If policy communication can be more frequent in the future, we think it may reduce short-term market sentiment fluctuations." As long as investors believe that China can remain competitive in the long run and the long-term return on investment is reasonable, more foreign investors will continue to be optimistic about China. ”

<h4>RMB bonds remain allocatively attractive</h4>

Liu Ligang believes that RMB bonds are still a good match for hedging cyclical risk assets. "The Fed's reduction or buying less debt heralds the beginning of the normalization of monetary policy in the United States, but the market expects its steps to be slower, and the spread of the Delta virus in the United States and the slowdown of the US economy in the second half of the year will also push back the timetable for the normalization of monetary policy in the United States, so the Chinese bond market is still relatively attractive."

At the same time, the management of China's monetary policy expectations and communication with the market are also more effective, and the trend of overseas institutions allocating RMB bonds has not changed." Under the influence of Huarong's avoidance of debt restructuring, overseas institutions have also increased confidence in Chinese dollar bonds. He added that with the improvement of local government rating capabilities, RMB local bonds are also an important direction for overseas institutional investment, and their credit risks are controllable but the returns are high, making them the choice of long-term institutional investors.

In the eyes of Luca Paolini, chief strategist at Pictet Asset Management, while regulatory policies will actually bring a permanent "risk premium" to China's stock and bond markets, they should not fundamentally change China's growth model or the broader trend of investing in Chinese financial assets. "Still, a greater degree of caution seems wise, and we feel justified in profiting from Chinese bonds that have performed strongly so far this year." But he still maintained his inflows in Chinese government bonds.

Xia, a China interest rate market strategist at UBS Securities, expects that the yield of the 10-year Treasury bond may fluctuate in a narrow range of 2.8%-3.0% in the short term. Citibank continues to be bullish on Chinese treasuries and expects the yield on the 10-year treasury note to remain in the range of 2.7%-2.95%.

According to the latest statistics of the Central Clearing and Settlement Corporation, as of the end of July, the custody of RMB bonds of overseas institutions reached about 3.38 trillion yuan, an increase of 75.4 billion yuan over June, a new high in the past five months, of which the allocation structure of foreign institutions is still dominated by treasury bonds, accounting for 65.24%.

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