Core view:
Guosen bank’s view: We reviewed the response of the Central Bank of China under the four rounds of interest rate increase cycle of the Federal Reserve since 1990, which shows that China’s monetary policy has always adhered to the main tone of “focusing on me” and always matched with China’s economic cycle. For example, the Fed’s monetary policy continued to tighten from 2014 to 2019, but China adopted loose monetary policy from 20142016q1 and 2018q2-2019, mainly because China was in the stage of steady growth in these two stages. From 2016q2 to 2018q1, China’s monetary policy tightened, mainly because China’s economic growth was strong at this stage, and deleveraging was the main tone.
It is expected that China’s monetary policy will remain relatively loose in 2022, but dominated by structural monetary policy. At present, China is still in the stage of steady growth. Combined with China’s independent monetary policy experience in the above-mentioned interest rate hike cycles of the Federal Reserve, we believe that China’s monetary policy will still adhere to the main tone of “focusing on me” in 2022. Under the environment of steady growth, the monetary policy will remain relatively loose and will not turn to tightening. After the special meeting held by the financial stability and Development Committee of the State Council on March 16, the market had high expectations for the reduction of reserve requirements and interest rates in March, but they all failed. We believe that the core is not the Federal Reserve’s interest rate hike, but the strong economic data from January to February disclosed by the Bureau of statistics, which exceeded the market expectations. At the same time, we believe that as the steady growth policy continues to increase, the steady growth effect will gradually appear. Therefore, the easing of monetary policy will not be too large. Considering the prominent economic structural problems, we judge that structural monetary policy will be the dominant in the future.
China’s monetary policy has always adhered to the main tone of “focusing on me”
Since 1990, the Federal Reserve has experienced four complete interest rate hike cycles, and a new interest rate hike cycle will be launched on March 17, 2022. We mainly review the response of the Central Bank of China under the four rounds of fed interest rate hike cycle:
The first round of fed interest rate hike was from February 1994 to February 1995, and the benchmark interest rate was raised from 3.00% to 6.00%. The Central Bank of China raised the benchmark deposit and loan interest rate twice in May and July 1993, earlier than the Federal Reserve raised interest rates.
The second round of fed interest rate hike is from June 1999 to May 2000, and the benchmark interest rate is raised from 4.75% to 6.50%. The Central Bank of China cut interest rates seven times from May 1996 to June 1999 and again in February 2002. From 1996 to 2002, the monetary policy was in a loose trend. At the same time, the central bank lowered the deposit reserve ratio by 2 percentage points in November 1999.
The third round of fed interest rate hike is from June 2004 to June 2006, and the benchmark interest rate is raised from 1.00% to 5.25%. From October 2004 to October 2017, the Central Bank of China raised interest rates nine times in a row, once in 2004, twice in 2006 and six times in 2017. The Federal Reserve raised interest rates five times in 2004, eight times in 2005 and four times in 2006. It has entered the interest rate reduction cycle since September 2007. It can be seen that there are great differences in the cycle and rhythm of interest rate increase between China and the United States.
The fourth round of fed interest rate hike is from December 2015 to December 2018, and the benchmark interest rate range is raised from 0% ~ 0.25% to 2.25% ~ 2.50%. At the same time, from December 2013 to October 2014, the Federal Reserve implemented taper and from October 2017 to August 2019, so the United States was in a monetary tightening cycle from 2014 to August 2019. From 2014 to 2019, China’s monetary policy will be divided into three stages. The first stage is from 2014 to the first quarter of 2016, when the central bank continued to cut reserve requirements and interest rates. From November 2014 to October 2015, the central bank continued to cut interest rates six times, lowered MLF interest rates in February 2016, and reduced reserve requirements four times from February 2015 to October 2015. The second stage is from the second quarter of 2016 to mid April 2018. The central bank continued to raise the policy interest rate represented by reverse repurchase and MLF, and the monetary policy is in a tightening cycle. The third stage is from mid and late April 2018 to 2019. The central bank lowered the reserve requirement for five consecutive times, and the monetary policy is in the loose stage.
Judging from the monetary policy adopted by the Central Bank of China in the above four rounds of fed interest rate hike cycles, there is no obvious correlation between the Fed interest rate hike cycle and China’s monetary policy. Combined with China’s economic cycle, it can be found that the four rounds of monetary policies of the Central Bank of China have adhered to the main tone of “focusing on me”:
The first round: China took the lead in raising interest rates in May 1993, mainly due to China’s overheated economy and sharp rise in prices in 1993. China’s economy has continued to rebound rapidly since 1991. In the first quarter of 1993, the real GDP growth rate has increased to 15.3%, and the year-on-year growth rate of CPI in the current month has increased to more than 12.0%, which is still in an upward trend. In the face of overheated economy and inflation, the Central Bank of China started raising interest rates before the Federal Reserve. From February 1994 to February 1995, the Federal Reserve entered the interest rate hike cycle, but China did not continue to raise interest rates at that stage, mainly because inflation was well controlled.
The second round: from 1996 to 2002, China was in a loose monetary policy cycle, and the core was that China’s economy was facing the pressure of recession. After raising interest rates in 1993, China’s economy fell sharply. In 1996, the central bank cut interest rates to help the economy achieve a “soft landing”. However, the Asian financial crisis that broke out in 1997 had a great impact on China’s economy. The real GDP growth rate fell below 8.0%, the year-on-year growth rate of CPI fell to a negative value, and China’s economy entered the stage of recession. In order to stimulate investment and consumption and expand domestic demand, the central bank continued to cut interest rates according to the needs of macro-control. As the impact of the Asian financial crisis on the U.S. economy was limited and gradually subsided, and the rapid rise of U.S. Internet technology in the 1990s led to strong U.S. economic growth, the Federal Reserve started raising interest rates in June 1999. However, due to the impact of the Asian financial crisis, China’s economic growth is still low, and the growth rate of CPI is basically in the negative growth stage. Therefore, the Central Bank of China continued to cut interest rates in June 1996, cut reserve requirements in November 1999, and cut interest rates again in February 2002. After 2003, China’s economy entered the recovery stage, and the central bank ended its loose monetary policy.
The third round: China continued to raise interest rates from 2004 to 2007, and continued to increase the deposit reserve ratio from September 2003 to June 2008. In September 2007, the Federal Reserve started to cut interest rates, but the Central Bank of China also started to raise interest rates and cut reserve requirements for many times in December 2007, mainly because China’s economy is in the stage of overheating. The Central Bank of China raised interest rates once in 2004, twice in 2006 and six times in 2007. It was approved once in 2003 and 2004, three times in 2006, ten times in 2007 and five times in 2008. The Federal Reserve raised interest rates for the last time in June 2006 and started to cut interest rates in September 2007. China’s monetary policy turned loose only after 2008, which was significantly later than that of the Federal Reserve. The main reason is that China’s economy has stabilized and recovered since 2003 and gradually become overheated. China’s real GDP grew by 14.23% in 2007. It began to fall back under the impact of the subprime mortgage crisis in 2008, and the central bank turned to loose monetary policy.
The fourth round: from 2014 to August 2019, the Federal Reserve continued to tighten its monetary policy, but the Central Bank of China adopted loose monetary policy from the first quarter of 2014 to 2016 and the second quarter of 2018 to 2019, mainly because China was in the stage of steady growth in these two stages.
From the second quarter of 2016 to the first quarter of 2018, China’s monetary policy tightened, mainly because China’s economic growth was strong at this stage, and deleveraging was the main tone. Since 2011, China’s economy has entered a continuous downward phase. In order to stabilize growth, the central bank started to cut interest rates at the end of 2014. From 2014 to 2015, the central bank cut interest rates six times, reduced reserve requirements four times in 2015, and lowered MLF interest rates in February 2016. From 2016 to the beginning of 2018, China continued to raise the policy interest rate, mainly because the successful supply side reform and the monetization of shed reform brought strong economic growth in 20162017. At the end of 2016, China started to reduce leverage, and the reduction of leverage in 2017 became the main tone. Therefore, the monetary policy turned to tightening at this stage. However, due to the impact of deleveraging and the Sino US trade war, China’s economy has faced significant downward pressure since 2018. Therefore, after the second quarter of 2018, China’s policy turned to steady growth again. From April 2018 to September 2019, the central bank lowered the reserve requirement for five consecutive times.
How should China’s monetary policy respond to the current round of Fed monetary tightening?
By reviewing the response of China’s monetary policy in the four interest rate hike cycles of the Federal Reserve since 1990, we can see that China’s monetary policy has always adhered to the main tone of “focusing on me”, which matches China’s economic cycle and is rarely affected by the shift of the Federal Reserve’s monetary policy. After the special meeting held by the financial stability and Development Committee of the State Council on March 16, the market had high expectations for the reduction of reserve requirements and interest rates in March, but they all failed. We believe that the core is not the Federal Reserve’s interest rate increase, but the strong economic data from January to February disclosed by the Bureau of statistics, which exceeded the market expectations.
On March 17, 2022, the Federal Reserve started a new round of interest rate hikes. As the CPI of the Federal Reserve is currently at an all-time high and the unemployment rate continues to decline sharply, it is close to a low level. The market expects the Federal Reserve to raise interest rates seven times in 2022, and the interest rate hike will continue until the first half of 2023. However, China’s current economic structural problems are prominent, the annual economic growth of 5.5% is still under pressure, and the CPI is also at a low level. Therefore, the main tone of China’s economy is still stable growth. Combined with the experience of China’s independent monetary policy in the above-mentioned interest rate increase cycles of the Federal Reserve, we believe that China’s monetary policy will still adhere to the main tone of “focusing on me” in 2022. Under the condition of steady growth, the monetary policy will remain relatively loose and will not turn to tightening.
It is expected that China’s monetary policy will remain relatively loose in the future, but dominated by structural monetary policy. Since the central economic work conference in the fourth quarter of 2021, China’s steady growth policy has continued to increase. The disclosed economic data from January to February show that the economy is highly endogenous, and we believe that the effect of steady growth will gradually appear. Therefore, we judge that the monetary policy in the future is limited, mainly structural policy. At present, the core of China’s economy is the prominent structural problems such as regions and industries. As shown in Figure 9, the PMI index of medium and large enterprises continues to be above the boom and bust line, but the PMI of small enterprises continues to decline, which has been below the boom and bust line for more than a year, and has accelerated the downward trend since the fourth quarter of last year.
The market is worried that the devaluation of the RMB and the sharp narrowing of the interest rate gap between China and the United States will lead to capital outflow, which will restrict the easing of China’s monetary policy. However, from the performance of the dislocation period of China’s and the United States monetary policy in 20182019, the interest rate gap and exchange rate between China and the United States are not the core influencing factors of China’s monetary policy, but economic growth and inflation. In terms of exchange rate, from the perspective of the dislocation of China US monetary policy in 20182019, the exchange rate will not become an important factor restricting China’s monetary easing. On the contrary, in the stage of steady growth, the policy may guide the devaluation of RMB and stimulate exports. At present, the central parity rate of the US dollar against the RMB is about 6.37 yuan, which is similar to the initial level of the dislocation of China US monetary policy in the previous round. The central parity rate of the US dollar against the RMB in the previous round was raised to about 7.10 yuan. Therefore, the current exchange rate provides sufficient space for China’s monetary policy easing. In terms of interest rate difference between China and the United States, the interest rate difference between China and the United States on 10-year Treasury bonds has been above 50bps for a long time. At present, the interest rate difference between China and the United States is about 60bps, at a low level. However, during the last round of dislocation of China US monetary policy, the interest rate difference between China and the United States continued to be below 50bps or even close to 20bps from the fourth quarter of 2018 to the first quarter of 2019. Therefore, we believe that the interest rate difference between China and the United States is not an important factor restricting China’s monetary policy.
Investment suggestions:
We reviewed the response of the Central Bank of China under the four-round interest rate hike cycle of the Federal Reserve since 1990, which shows that China’s monetary policy has always adhered to the main tone of “focusing on me”. At present, China is still in the stage of steady growth. Therefore, it is expected that monetary policy will remain loose and will not turn to tightening. At the same time, we believe that as the steady growth policy continues to increase, the steady growth effect will gradually appear. However, at present, China’s economic structural problems are prominent, so it is expected that the structural monetary policy will dominate in the future.
Under the prudent and loose monetary policy and active fiscal policy, we are not pessimistic about the economy in 2022. With the stabilization and recovery of the economy, the banking sector will also usher in better investment opportunities and maintain the “over allocation” rating of the industry. In terms of individual stocks, it is suggested to select individual stocks from two perspectives: first, Bank Of Chengdu Co.Ltd(601838) , which benefits from the main line of steady growth; Second, small and medium-sized banks with good regional economy and strong credit demand are recommended to pay attention to Bank Of Ningbo Co.Ltd(002142) , Jiangsu Suzhou Rural Commercial Bank Co.Ltd(603323) , Jiangsu Zhangjiagang Rural Commercial Bank Co.Ltd(002839) , Jiangsu Changshu Rural Commercial Bank Co.Ltd(601128) .
Risk tips:
If the macroeconomic recovery is less than expected, it may affect the banking industry from many aspects, such as the negative impact of loose monetary policy on the net interest margin during the economic downturn, the increase of non-performing loans caused by the economic downturn, etc.
