The RMB fell below 6.4 after seven months, and there were significant adjustments in the A-share and bond markets. However, it is strange that the yen next door (relative to the US dollar) fell below 128 after nearly 20 years, with a greater depreciation, but the Nikkei index rose 0.86%. Since 2022, the expectation of the Federal Reserve's radical tightening has been constantly fermented and upgraded in the global exchange rate and interest rate market. Considering that the US dollar has stood at 100 and the interest rate difference between China and the United States has been upside down, will the RMB reverse its previous strength and start a substantial "make-up decline"? How to understand the relationship between recent exchange rates at home and abroad and stocks and bonds? These are the two questions we are trying to answer.
We believe that the second quarter of 2022 is a period of relatively concentrated pressure on RMB devaluation, but the RMB exchange rate will return to shock appreciation in the second half of the year.
The 25bp RRR reduction and interest rate inaction gave the market a hint that "the central bank should stabilize the exchange rate". The operation of monetary policy in May is very important, and the cost of the central bank's continued restraint will be borne by the stock market and bond market.
The pressure of RMB devaluation in the second quarter of 2022 comes not only from the macro narrative of the differentiation of China US economic policies, but also from the concentrated impact of cross-border capital flows.
From the deduction of macro narrative, the extreme of Sino US differentiation (and its expectation) may appear in the second quarter. In terms of policies and expectations, the statement of a single interest rate increase of 75bp (St. Louis Fed chairman Brad) has surfaced in the United States, which is the largest single interest rate increase since the 1990s, which was only used in November 1994. The doubts caused by the uncertainty of shrinking the table will also gradually dissipate after the interest rate meeting in May. In China, the economy will hit the bottom for the second time in the second quarter of 2022, and the policy support will continue. The stabilization of the economy in the third quarter is a high probability event.
Perhaps more importantly, the pressure on cross-border capital outflows will rise in the second quarter. This pressure mainly comes from four aspects:
First, under the background of the reduction of bonds held by global investment institutions, the narrowing and even upside down of the interest rate gap between China and the United States, the pressure of capital outflow from the bond market will continue. In February and March 2022, foreign investors will reduce their holdings of bonds by about 192 billion yuan in the inter-bank market, and this outflow will continue in the second quarter;
Second, the external debt repayment pressure of Chinese real estate enterprises in the second quarter was significantly higher than that in the first quarter. According to Bloomberg data, the repayment scale in the second quarter was about US $18 billion (about US $55 billion in 2022). Considering that it is difficult for Chinese real estate enterprises to issue new and repay old debts abroad, in addition to the realization of overseas assets, some debts may be repaid by converting Chinese funds into US dollars;
Third, the second quarter is usually the time when Chinese enterprises pay more dividends. Taking Mao index, which has a large proportion of foreign capital, as an example, its constituent companies pay dividends mainly from May to July. Foreign capital is also likely to be converted into US dollars and flow out of China after receiving dividends.
Fourth, due to the narrowing of the interest rate gap between China and the United States, the scale of offshore RMB time deposits may decline significantly. Overseas institutions and individuals often use offshore time deposits to carry out interest arbitrage and foreign exchange arbitrage. With the decline of RMB deposit interest rate and the expectation of depreciation, some deposits will also be converted into US dollars for outflow.
The pressure of capital outflow in the second quarter is great, and the US dollar liquidity of domestic banks will decline significantly, which may lead to the recovery of the correlation between RMB and US dollar. From the second half of 2020 to March 2022, the external net assets of domestic banks have increased by 1.35 trillion yuan (about 205 billion US dollars). The pressure of capital outflow in the second quarter will significantly "dilute" the "family background", but whether it will "overdraft" depends on the situation of foreign trade and bank settlement and sales of foreign exchange. We think this probability is small. Under such circumstances, the correlation between the US dollar / RMB exchange rate and the US dollar index may gradually return to "normal" - the US dollar rises and the RMB falls, while the US dollar falls and the RMB rises.
The logic of RMB shock appreciation in the second half of the year will switch to the weakening of the US dollar. In our previous report "the cruel hand of raising interest rates, the unsolved mystery of the Federal Reserve in 1994", we judged that the US dollar index will weaken in the second half of 2022, mainly based on the more important fundamental reasons: the stabilization and rebound of China's economy and the improvement of the global economy brought about by the marginal easing of the conflict between Russia and Ukraine, in addition to the gradual disappearance of the advantage of US bond interest rate spread.
How does the exchange rate affect the stock and bond markets? The focus of central bank policy is very important. The RMB fell below 6.4, while A-Shares and treasury bonds were significantly adjusted. However, in Japan across the sea, the Nikkei index stabilized and rebounded under the accelerated depreciation of the yen. The important point is that under the YCC policy, the Bank of Japan pays more attention to China's interest rate and economy, while the people's Bank of Japan recently lowered the reserve requirement by 25bp, and keeping the interest rate unchanged suggests a signal to the market that exchange rate stability still seems to have a great weight in the policy consideration of the people's Bank of China.
Under the policy logic of the Bank of Japan, the depreciation of the exchange rate is circulating and good for the stock market. Yen is an important financing currency in the world, and its mainstream trading logic is interest rate spread, especially the interest rate spread between the United States and Japan - the greater the interest rate spread between the United States and Japan, the greater the pressure on the depreciation of yen relative to the US dollar. In the environment of global investors reducing their positions in bonds, Japanese bonds are not immune. The 10-year Japanese bonds hit the policy ceiling of 0.25%. The Bank of Japan resolutely entered the market to purchase bonds on a large scale to prevent the interest rate from rising further, which led to the investment of yen liquidity and the passive widening of the interest rate gap between the United States and Japan, devaluing the Japanese dollar, while the stock market rose due to the favorable "water release".
The policy logic of the people's Bank of China means that the stock market and bond market should bear the cost of stabilizing the exchange rate. In the case of weak economic stabilization, the consideration of stabilizing the exchange rate will make monetary policy loose. The combination of "bad fundamentals + cautious policies" is very unfriendly to the stock market. To some extent, it can be said that the stock market and bond market bear the cost of stabilizing the exchange rate.
Doing is more important than saying, "focusing on me" requires more policy communication and implementation. Since the second half of 2021, the people's Bank of China has stated on many occasions that the policy should "focus on me" and "improve the flexibility of exchange rate". However, in the context of the negative interest rate spread between China and the United States and the impact of the epidemic, the 25bp RRR reduction and the inaction of interest rates undoubtedly suggest to the market that the central bank still seems to pay attention to the exchange rate. Although we have reason to believe that the experience of the first quarter of 2020 makes the central bank realize that substantial easing before the epidemic is effectively controlled may not be conducive to economic stabilization, but may lead to unrealistic funds and exacerbate inflation. At the end of April and the beginning of May, the epidemic situation in Shanghai may be initially controlled. What the people's Bank of China will do next is very important for the exchange rate, stock market and bond market. If we continue to exercise restraint, the stock, bond and foreign exchange markets will face greater fluctuations.
Risk tip: the spread of the epidemic exceeded market expectations, and the policy hedging economic downturn was less than market expectations
