Issue 419 of express review: Comments on the upside down of interest rate difference between China and the United States on April 11 - the upside down of interest rate difference between China and the United States has an impact on the market in the short term and limited impact in the medium term

Event: on April 11, the yield of China US 10-year Treasury bonds reversed for the first time in nearly 12 years. On the same day, A-Shares fell sharply, the Shanghai Composite Index fell by more than 2.5%, and the onshore and offshore RMB exchange rates also depreciated.

Our comments are as follows:

(I) take history as a mirror: this round of upside down of interest rate spread between China and the United States is different from the past

According to the usual logic, the upside down of interest rate spread between China and the United States is unfavorable to China, which may lead to cross-border capital outflow, and then impact the stock, debt, foreign exchange and other markets. There have been five rounds of upside down of China US interest rate spread before 2011, but now, unlike in the past, the macro environment of this round of China US interest rate spread upside down is different from that in the past.

On the one hand, China's opening-up under capital account is a process of continuous promotion. Before 2011, China's capital control was more stringent than at present, and it was difficult for cross-border funds to enter and exit. The amount of foreign investment in A-Shares through QFII was limited, and the investment inter-bank bond market was approved only in 2013. In other words, at that time, China's stock and bond market was still in the early stage of opening to the outside world, the proportion of foreign capital was small, and the impact of capital outflow on the capital market was small.

On the other hand, at that time, the market-oriented pricing of RMB exchange rate was insufficient, and it was in the unilateral appreciation stage driven by policy most of the time. The upside down of interest rate spread between China and the United States basically had no impact on the exchange rate.

However, with the continuous opening up of China's capital account and the continuous increase of the proportion of foreign capital in the mainland stock and bond market, we believe that the impact of this round of spread inversion on China's capital market should be greater than 12 years ago.

(II) outlook of China US interest rate spread: the duration and range of upside down should be limited

Although the macro environment has been different, we believe that the duration and range of this round of China US 10-year Treasury bond interest rate spread should be limited, which is beneficial to limiting the fermentation of negative effects.

First of all, for US bonds, there is still room for US bond interest rates to rise. However, considering that the US inflation rate will rise first and then fall, it is expected that the monetary policy tightening of the Federal Reserve will also show a "short and fast" rhythm. Therefore, the rise of us bond long-term interest rates will mainly focus on the first half of the year, and there is a possibility of decline in the second half of the year.

Secondly, for China bonds, the current interest rate is relatively stable, which will increase the pressure of upside down interest rate spread between China and the United States. However, considering the urgency and necessity of steady growth, it is only a matter of time before the effect of steady growth is expected. According to the financial data of March released today, credit and social finance are significantly better than expected and previous values, and wide credit seems to have begun to see the effect. It is expected that the interest rate of Chinese bonds will rise steadily as a whole, but it is difficult to fluctuate greatly as a whole. The fluctuation space of Chinese bond interest rate is expected to be significantly smaller than that of US bonds.

Therefore, driven by the rapid rise of US bond interest rate in the first half of the year, it is expected that the approximate rate of China US interest rate spread in the second quarter will continue to hang upside down, and the range will widen, and the upside down range may reach about 20-30bp. However, with the decline of US bond interest rate and the steady rise of Chinese bond interest rate in the second half of the year, the upside down of China US interest rate spread will tend to ease, or even disappear.

(III) capital market impact: there is an emotional impact in the short term, and the impact in the medium term is controllable

In the short term, as the upside down of interest rate difference between China and the United States reappears after 12 years, and the macro environment is different from that 12 years ago, the market's concern about capital flight will increase, which will inevitably have an impact on the psychological level of the market. If foreign capital concentrates on the stock and bond markets and continues to sell assets in the short term, the fear may be further fermented, and the risk of further increasing short-term fluctuations in the stock, bond and foreign exchange markets is worthy of attention.

However, in the medium term, considering that the upside down time and range of interest rate spread between China and the United States are relatively limited, it should not have a lasting and decisive impact on asset prices. The bond market still needs to pay attention to the landing of wide credit, A-Shares are more vulnerable to the upward impact of US bond interest rates, and the exchange rate needs to pay attention to capital outflow and changes in trade.

For a shares, the narrowing of the interest rate gap between China and the United States may lead to capital outflow and lead to periodic pressure on the micro liquidity of the stock market. In fact, compared with the upside down of interest rate difference between China and the United States, the soaring real interest rate of US bonds has a greater impact on a shares. Since 2016, with the continuous inflow of foreign capital, A-Shares have become more and more sensitive to the external environment. When the real interest rate of US bonds soars, A-Shares tend to fall, and the correlation coefficient between the two is as high as -0.85, especially on growth stocks.

For the exchange rate, the upside down of China US interest rate spread will indeed lead to the risk of capital outflow under the capital account, which will have a negative impact on the exchange rate. However, at present, China's exports are still strong, the trade surplus is high, and the foreign exchange settlement force of the real sector has formed a huge support for the exchange rate. Therefore, although the RMB has depreciated, the range is always limited. If we can see a significant slowdown in export growth in the future, the depreciation pressure of capital outflow on the RMB exchange rate is expected to become more and more obvious.

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