Investment summary:
Since 2014, the interest rate spread between China and the United States has fluctuated between 24bp (2018) - 249bp (2020) for a long time. The minimum value appeared in 2018, reflecting the dislocation of China US monetary policy, and the convergence of China US interest rate spread was obvious until the minimum value of 24bp appeared in November. The maximum value appeared in 2020. In 2020, under the influence of the epidemic, China's economy grew significantly negatively in Q1, the U.S. economy grew slightly positively, and the interest rate difference between China and the United States reached a low point in the year. Then China took the lead in getting out of the epidemic constraints and resuming industrial production. However, the U.S. epidemic continued to deteriorate, the economic difference between China and the United States expanded, the interest rate difference between China and the United States continued to widen, and the maximum value of Q3 was 249bp.
Since 2014, China US policy cycles have been misaligned twice. Taking the one-year LPR interest rate and the reserve ratio of small and medium-sized deposit financial institutions as China's policy interest rate and the US federal fund interest rate as the US policy interest rate, we can find that there have been two obvious policy cycle dislocations since 2010 (China is loose and the United States is tight, starting from China). From November 2014 to March 2016 (lasting for 16 months) and February 2018 to April 2019 (lasting for 14 months).
In the past, the interest rate spread between China and the United States converged first and then widened in the dislocation cycle between China and the United States.
In the first round, on December 16, 2015, the Federal Reserve raised interest rates for the first time in nearly 10 years. Since the outbreak of the financial crisis in 2008, the United States has successively launched three rounds of quantitative easing. In December 2015, the Federal Reserve began to raise interest rates for the first time after three rounds of QE, raising 25bp, and raising the benchmark interest rate from 0.25% to 0.5%.
In the second round, on March 17, 2018, the Federal Reserve raised interest rates for the first time in the year. On the same day, the Federal Reserve Open Market Committee announced that it would raise the target range of the federal funds rate to 0.25% - 0.5%, which was in line with market expectations.
In this round, on March 17, 2022, the Federal Reserve announced that the FOMC meeting in March decided to raise interest rates by 25 BP, which became the first interest rate increase since December 2018. In the future, the dot matrix of the Federal Reserve's interest rate suggests that interest rates may continue to be raised at the remaining six meetings of this year, and the table contraction will follow. After the Fed raised interest rates this round, the yield of us long-end treasury bonds first decreased and then increased, rising by 14bp within a week. Accordingly, the interest rate gap between China and the United States also continued to converge, with a range of 12bp.
The change in the interest rate spread between China and the United States reflects the strength of the US economy relative to China. As the economic cycle progresses to different stages, the policy is adjusted accordingly to stabilize the cycle fluctuation. Under the background of the dislocation of China US policy cycle, the interest rate spread will continue to converge until the economy and policy enter the next stage, the convergence ends and begins to widen.
Since 2021, with strong overseas fiscal stimulus and strong recovery of demand, US debt began to rise and interest rate spread continued to shrink. Although China's exports increased accordingly, domestic demand weakened, including the continuous impact of weak consumption, while China's debt showed a phased downward trend.
Looking back, overseas, on the one hand, with the suspension of overseas subsidies, demand and demand expectations began to slow down, that is, the upward space of the long-term yield of US bonds is limited; On the other hand, the interest rate hike based on high inflation began and is expected to continue to intensify, the short-term rise of US bonds is fast, and the yield of US bonds may continue to flatten. In China, on the one hand, the external demand slows down and the high level of exports falls. Due to the repeated weakness of the epidemic in Hong Kong and then Shanghai, it is more difficult to recover consumption. If we turn to stimulate internal demand and maintain concentration in the counter cycle, the interest rate gap between China and the United States will continue to converge first and then widen.
Risk tips: escalation of geographical conflicts, repeated and large-scale recurrence of epidemics, changes in overseas relations, non recurrence of historical experience, etc.
