Recently, under the background of the rapid narrowing of the interest rate gap between China and the United States, there has been a significant outflow of foreign capital in the equity and bond markets. Both are driven by the interest rate gap? Will the outflow of foreign capital aggravate the pressure of RMB devaluation? The analysis of this paper can be used for reference.
Q: Why did the interest rate gap between China and the United States narrow rapidly? Currency cycle dislocation, inflation expectation disturbance
Recently, the interest rate spread between China and the United States has narrowed rapidly, and the yield of 10-year Treasury bonds is approaching upside down. From November to December 2020, the interest rate spread between China and the United States of different maturity treasury bond yields peaked one after another, and then began to narrow. Since December 2021, the narrowing rate of interest rate spread between China and the United States has accelerated significantly. In four months, the interest rate spread between China and the United States of 10-year and 2-year treasury bonds has narrowed by 138bp and 223bp respectively. At present, the interest rate spread between China and the United States between two-year and five-year treasury bonds has been upside down, while the 10-year Treasury bond has narrowed to 3.3bp, which is only one step away from upside down.
The dislocation of the monetary cycle between China and the United States is the main reason, and the differentiation of inflation situation also disturbs the interest rate spread between China and the United States. Historically, the interest rate spread between China and the United States was mainly determined by the differentiation of monetary cycles between China and the United States. Since December last year, the Federal Reserve has completed the table contraction and started raising interest rates to accelerate the normalization of monetary policy; The Central Bank of China has conducted a comprehensive RRR reduction and two LPR reductions, which has significantly differentiated the monetary cycle between China and the United States. In addition, US inflation is high, China's CPI remains low, and the differentiation of inflation situation also affects the fluctuation of China US interest rate spread.
Second question: in history, how did the interest rate difference between China and the United States affect cross-border capital flows? Impact the bond market and disturb the stock market
Since 2015, the impact of arbitrage transactions on cross-border capital flows has increased, among which the offshore market funds are more sensitive to the interest rate spread between China and the United States. With the improvement of RMB exchange rate elasticity after the 811 foreign exchange reform in 2015, the impact of arbitrage transactions on cross-border capital flows has weakened, while the impact of China US interest rate spread has increased. Among them, in the onshore market, the capital account balance of bank settlement and sales of foreign exchange is less sensitive to the interest rate difference between China and the United States; In the offshore market, in the middle and late stages of the last four rounds of narrowing of the interest rate gap between China and the United States, there has been a certain scale of foreign capital outflow.
The flow of foreign capital in the bond market is more sensitive to the interest rate spread between China and the United States, while foreign capital in the equity market is more affected by the asset price between China and the United States, and the interest rate spread also disturbs the trading funds. Historically, there has been a high correlation between foreign debt holdings and the interest rate difference between China and the United States. The three net outflows of overseas debt holdings in February 2016, January 2017 and October 2018 occurred after the inflection point of interest rate difference between China and the United States, mainly the reduction of government financial debt. In the equity market, the difference between the return on assets of China and the United States has a stronger explanation for the flow of funds going north, and the trading market will be disturbed by the interest rate difference between China and the United States.
Question 3: what is the impact of cross-border capital on the exchange rate in this round of upside down interest rate spread between China and the United States? Short-term impact, medium-term regardless of the short-term. The upside down of interest rate spread between China and the United States still disturbs interest rate bonds and funds going north, but the impact on the exchange rate may be limited. Historically, the RMB exchange rate will be disturbed by the outflow of foreign capital from the securities market, but with the end of the net outflow of foreign capital, the exchange rate will stabilize again. This round, the upside down of interest rate spread between China and the United States may have an impact on foreign trading funds, and then disturb the exchange rate. At present, trading funds account for 13.7% of the funds going north. Among the 3.4 trillion treasury bonds and government financial bonds held by foreign investors, the proportion of trading funds is also low, and the impact of foreign investment may be relatively limited.
Both China US interest rate spread and RMB exchange rate are the mapping of China US economic fundamentals. The differentiation of fundamentals and the superposition of high real interest rates will provide support for the RMB exchange rate. The fundamentals of the two countries are the common factors driving China US interest rate spread, asset prices and RMB exchange rate. From the perspective of PMI, the fastest stage of U.S. economic recovery has been seen, while China's PMI is picking up from the end of November last year. After returning to fundamentals, the exchange rate is still supported. In addition, after excluding inflation, the current real interest rate spread remains high, which will also support the RMB.
Risk tip: the tightening of monetary policy of the Federal Reserve exceeded expectations, the outflow of foreign capital exceeded expectations, and the recovery of global demand and supply chain interruption was less than expected
