Event: on April 25, A-Shares fell sharply across the board, and the Shanghai composite index broke 3000 points; The central parity of RMB has fallen for nearly 4906 consecutive days since February and may; As usual, a meeting of the Political Bureau will be held at the end of this month. Core view: things are changing. Keep an eye on the Politburo meeting at the end of the month.
1. Since the beginning of the year, A-Shares have been falling endlessly, which can be divided into four reasons: tightening global liquidity, conflict between Russia and Ukraine, worsening epidemic situation and less than expected policy strength; The recent sharp decline, especially on April 25, is mainly due to the deterioration of the epidemic situation in China and the lack of market confidence; In the short term, the risk has been released as a whole, but unless these repressive factors improve significantly, the market may still be under pressure. From the beginning of the year to the middle and late February, the Fed's expectation of raising interest rates continued to ferment. The rising yield of US bonds and the tightening of global liquidity should be the leading factors for the decline of a shares; From February 24 to early March, the conflict between Russia and Ukraine broke out, the global stock market fell sharply, and China was not spared. In addition, the variables in China US relations increased, causing capital outflows; Since the middle and late March, the epidemic situation in China, especially in Shanghai, has continued to deteriorate. Coupled with strict epidemic prevention and control, the economy has been greatly impacted. During this period, the "discount" standard reduction of 25bp, the continuous failure of interest rate reduction, and the failure of substantial loosening of real estate have pointed to the insufficient strength of steady growth policy. With the increase of confirmed cases of the epidemic in Beijing over the weekend (4.24), and there are signs that stricter sealing and control may also be taken, which led to the sharp decline of A-Shares on Monday (4.25).
2. There are four main reasons for the recent sharp depreciation of the RMB against the US dollar: the US Federal Reserve's interest rate hike pushed up US dollar bonds and the upside down of the interest rate gap between China and the United States; The global epidemic situation is still poor, but the overall situation is "flat". The epidemic situation in China is deteriorating, but it is fully sealed and controlled; China's export weakness is expected to heat up; The conflict between Russia and Ukraine has increased the uncertainty of China US relations; Looking back, the central bank's 4.25 reduction in the foreign exchange deposit reserve ratio is more a signal to stabilize the exchange rate, but its practical effect is limited. It is expected that the RMB will still tend to depreciate in the short term. About 6.7 is an important observation point. Throughout the year, the RMB exchange rate should be depreciating and stabilizing.
Since the beginning of March, the spot exchange rate of RMB against the US dollar has continued to depreciate from the low point of 6.31; The depreciation accelerated after mid April, from 6.37 on April 18 to about 6.57 on April 25. Specifically, there are four main reasons for the recent rapid depreciation of the RMB: 1) due to the rising expectation of the Federal Reserve to raise interest rates, the US dollar index has risen by 3.9% since the beginning of March, and recently stood above 100. The US bond yield has also risen sharply. The interest rate spread between China and the United States 10Y treasury bonds has narrowed rapidly from about 100bp, and has continued to hang upside down since mid April; 2) The data of the past two years show that the global epidemic has worsened and the RMB has tended to appreciate, while the epidemic in China has deteriorated significantly since early March; 3) Due to the fading of seasonal factors and the decline of exports, the surplus of bank settlement and sales of foreign exchange on behalf of customers has fallen. Considering that China has taken comprehensive sealing control and the world tends to "lie flat", the expectation of China's export weakness is rising: 4) the conflict between Russia and Ukraine has increased the uncertainty of China US relations. Since the Sino US trade conflict in 2018, the RMB exchange rate has been highly correlated with China US relations, which generally shows that "China US relations are good, the RMB rises; China US relations are poor, and the RMB depreciates".
On April 25, the central bank announced that it would reduce the foreign exchange reserve ratio from 9% to 8% from May 15, in order to alleviate the pressure of RMB devaluation. However, historically, the impact of the adjustment of foreign exchange reserve ratio on the RMB exchange rate is relatively limited. In the future, we expect that the RMB exchange rate will still tend to depreciate in the short term. However, with the gradual control of the epidemic in China, there is little room for the further rise of the US dollar index, and it is difficult for the US bond yield to continue to rise, the RMB devaluation range is limited, but the general trend should be stable in devaluation, of which about 6.7 is an important observation point.
3. As usual, a meeting of the Political Bureau will be held at the end of April. The main tone of this meeting will also determine the general direction of China's economy and market. On the whole, the follow-up policies need to deal with the "four balances": first, balance the relationship between "controlling the epidemic vs stabilizing growth, supply, employment and prices"; Second, balance the relationship between "loose real estate vs controlling house prices and economic transformation"; Third, balance the relationship between "grasping the implementation vs. changing the term and accountability"; Fourth, balance the relationship between "stabilizing the external vs. Russia Ukraine conflict, China US game, and the Fed's interest rate increase and contraction table". Here are our 4-point outlook for the meeting:
The meeting will summarize the economic operation since the beginning of the year: Based on the press conference of the Bureau of statistics on April 18 and the article "ten questions on China's economy" of Xinhua News Agency on April 19, it is expected that the general tone for the GDP growth rate of 4.8% in the first quarter should be "the overall operation of the economy is within a reasonable range and remains stable on the whole; the current achievements are not easy";
The meeting will analyze the internal and external environment faced by China's economy in the next stage: Based on the meeting of Jin Wen on March 16, the national standing committee meeting since April, the speech of the premier's visit to Jiangxi on April 11, the article of Xinhua News Agency on April 19 and other meetings, it is expected to highlight factors such as China's epidemic situation and the conflict between Russia and Ukraine, The general tone should be the expression "the uncertainty of China's external environment has increased, some of which are higher than expected; new situations and new situations have emerged in economic growth; new downward pressure has further increased";
The meeting will put forward the general policy tone for the next stage: for the 5.5% growth target, "whether to ensure" is a matter of will and "whether to ensure" is a matter of ability. They tend to think that it is undoubtedly very difficult to achieve about 5.5%, but they should not explicitly give up. The probability will try their best to stabilize growth and further enhance the importance of stabilizing employment and prices; The specific tone should still be stability and seek progress while maintaining stability. It should also continue the expression of "policies to stabilize the economy should come out early and quickly, do not come up with measures that are not conducive to stabilizing expectations, and carefully introduce contractionary policies";
The meeting will put forward specific policies for the next stage: in the face of severe downward pressure on the economy, there should be a series of combined punches, multi pronged and multi measure measures. To maintain our previous judgment, there will be two "unique skills" for steady growth: first, promote the implementation of existing policies as soon as possible, and all parties should be required to "take the initiative" and strengthen their implementation; Second, in addition to the policy of "early and fast", the combination of controlling the epidemic situation, ensuring logistics, easing finance, loosening real estate, expanding infrastructure, promoting consumption and stabilizing foreign trade is more important. Among them, the focus is on the relevant statements of controlling the epidemic situation and loosening real estate.
Risk warning: the epidemic situation and the deterioration of the external environment exceeded expectations, and the implementation of policies was less than expected.
