Key investment points:
The importance of the interest rate spread between China and the United States is that it can reflect the trade-offs between economic entities holding US dollar assets and holding RMB assets. The interference of China US interest rate spread on monetary policy is realized by strengthening the constraints of RMB exchange rate and cross-border capital flow. By looking back on the history of "upside down" and "normalization" of China US interest rate spread from 2002 to 2022, in the narrowing trend of China US interest rate spread, if there is a resonance between the deterioration of balance of payments (capital flight) and the depreciation of RMB exchange rate, the external balance will put pressure on monetary policy, However, as long as the RMB exchange rate remains stable or the balance of payments is basically balanced, the narrowing of the interest rate gap between China and the United States will not restrict the space of monetary policy.
RMB exchange rate: since 2020, the RMB exchange rate has been priced by the real interest rate spread. The exchange rate fluctuation is no longer sensitive to the changes of interest rate spread and monetary policy. The RMB exchange rate is looking for the inflection point of "China US real interest rate spread", that is, the inflection point of "China US inflation difference".
Cross border capital flow: from the change of interest rate difference between China and the United States to the fluctuation of foreign exchange, the most core transmission mechanism is the adjustment of asset liability behavior of enterprises, residents and financial institutions. The changes of foreign exchange settlement and sales directly affect the fluctuation of foreign exchange. After 2020, the active foreign exchange settlement rate continues to be higher than the active foreign exchange sales rate, and the scale of foreign exchange deposits continues to reach a new high, forming the second layer of protection for regulating the balance of payments.
How to operate the Central Bank of China under the "upside down" of interest rate spread: when the internal balance problems such as economic downturn and credit crunch need monetary easing, while the external constraints such as the Fed's interest rate increase are strong, monetary policy needs to focus on internal balance and take into account external balance to find a balance point.
The high real exchange rate and real interest rate of RMB restrain the overall economic demand and determine that monetary policy needs to be loose. The narrowing of the nominal interest rate difference between China and the United States is not likely to restrict the easing of monetary policy in turn before the inflection point of the difference between China and the United States inflation rate is seen.
The difference between the benchmark interest rates of China and the United States shows that the difference between dr007 and the federal benchmark interest rate remains more than 160 BP, which can withstand the interest rate increase of at least 75 BP by the Federal Reserve in the second quarter. From the perspective of breaking the tightening dilemma of rising real interest rate and real exchange rate, "interest rate cut" is still an option for policy.
Risk tips: (1) the tightening path of monetary policy of the Federal Reserve is more steep; (2) The global inflation level continues to rise, and the risks of economic recession and "stagflation" increase; (3) The development of the epidemic situation in China since March and the risk of the adjustment of the current epidemic prevention policy.
