The interest rate gap between China and the United States is a process of narrowing
The main factors leading to the narrowing of interest rate spread are the deviation of monetary policies between China and the United States and the dislocation of economic cycle
Historical data show that the performance of Hong Kong stocks is uneven after the upside down of interest rates between China and the United States; During the narrowing of interest rate spread, there was a correction in Hong Kong stocks
The interest rate spread between China and the United States is upside down. On April 11, the yield of 10-year US Treasury bonds and 10-year Chinese treasury bonds closed at 2.782% and 2.765% respectively. The interest rate difference between China and the United States (that is, the difference between the yield of 10-year Chinese treasury bonds and the yield of 10-year US Treasury bonds, the same below) fell into a negative range, and the interest rates between China and the United States were inverted. Previously, the narrowing of the interest rate gap between China and the United States has lasted for a long time. This upside down only represents a node in the process of narrowing the interest rate gap, not an inflection point of the trend. This round of interest margin narrowing began in November 2020. Up to now (April 19), the cumulative narrowing range of interest margin is 264.0 basis points. Since the beginning of December, driven by the upward yield of US bonds, the rate of narrowing of interest rate spread has accelerated significantly. The main driver of this round of narrowing interest rate spread is the sharp rise in the yield of 10-year US bonds, and the decline in the yield of 10-year Chinese treasury bonds has a relatively small contribution. In history, the last upside down of China US interest rate spread occurred in December 2009.
Behind the narrowing of interest rate spread is the deviation of monetary policies between China and the United States, and the fundamental reason for the deviation is the dislocation of economic cycles between the two countries. Since the second half of 2021, China’s monetary policy has gradually become loose, mainly due to the gradual slowdown of China’s economic growth momentum and the increasing downward pressure from inside and outside. Steady growth has become the main tone of the policy. In the United States, since the fourth quarter of last year, the Fed has tended to be hawkish. Concerns about the rising inflationary pressure and expectations for the increase of policy interest rates have been strengthened. Fighting inflation has become the primary task of the Fed. After the FOMC meeting in March this year, the Federal Reserve announced its first interest rate hike. The dot matrix chart in March shows that FOMC members expect to raise interest rates by 150 basis points for the rest of 2022. At present, the implicit expectation of interest rate futures shows that the Federal Reserve will raise interest rates by 50 basis points at its two meetings in May and June respectively. Looking forward to the future, the upside down of interest rates may remain for some time. If US inflation expectations intensify further, the upside down range may still rise. When the trend of narrowing interest rate spreads will usher in an inflection point mainly depends on the decline of US inflation expectations and the cooling of expectations of tightening monetary policy of the Federal Reserve, as well as the strength of China’s steady growth policy and the recovery of the economy from the bottom.
Impact on the stock market. 1) In the past, the stock market performance was uneven after the interest rates of China and the United States upside down. We analyzed the performance of Hong Kong and US stocks after the three negative interest rate spreads between China and the United States since 2007. The data show that Hong Kong and US stocks fell after the interest rate inversion between China and the United States in September 2008, while Hong Kong and US stocks rose to varying degrees after the two inversion in 2009. 2) In the past, there was a correction in the Hong Kong stock market during the narrowing of the interest rate gap between China and the United States. Previously, since the global financial crisis, the interest rate gap between China and the United States has narrowed in two main ranges: from January to December 2015 and from November 2017 to November 2018, both lasting about one year. During this period, the S & P 500 index rose, while the Hang Seng Index / MSCI China index corrected. 3) Since the current round of narrowing of the interest rate gap between China and the United States, the Hong Kong stock market has made a sharp correction. Up to now (April 19), the cumulative narrowing range of interest rate difference between China and the United States in this round has been much higher than that in the previous two rounds. Similar to the previous two rounds, the S & P 500 index recorded a cumulative increase of 24.6%; The Hang Seng Index / MSCI China Index has a cumulative correction of 20.2% / 34.4%, which is also much higher than the cumulative decline of the previous two rounds. We believe that the market has fully digested and reflected the impact of the factors leading to the narrowing of interest rate spread (i.e. the tightening of monetary policy of the Federal Reserve and the increasing downward pressure on China’s economy). The further downward space of the stock market is limited, but the Hong Kong stock market will continue to fluctuate at the bottom in the near future.
Our point of view. The valuation of Hang Seng / MSCI China / CSI 300 index is 9.8 times / 10.4 times / 12.0 times forward-looking P / E ratio respectively (the median level in the past three years is 11.1 times / 12.9 times / 13.1 times). At present, the sentiment in the Hong Kong stock market is weak, and investors are more sensitive to signals such as the upside down of interest rates in China and the United States, worrying that it will become a catalyst for further decline in the market. As mentioned earlier, we believe that the current market has fully reflected the impact of the sharp narrowing of the interest rate gap between China and the United States, and there is limited room for further decline, so investors should not worry too much. We expect the market to fluctuate at the bottom and increase the volatility in the short term. We are concerned about the pressure of high inflation in the United States and the risk of accelerating the pace of interest rate hikes in the coming months; If the US stock market callback, it will have a spillover effect on the Chinese stock market and Hong Kong stock market. Main risks: 1) global epidemic; 2) The situation in Russia and Ukraine has further deteriorated, and the sanctions imposed by western countries have exceeded expectations; 3) The accelerated tightening of monetary policy by the Federal Reserve may lead to a correction in US stocks and it is difficult for the Hong Kong stock market to be alone; 4) China’s economic recovery is weak, but the policy strength is less than expected; 5) China US relations continued to be tense and even deteriorated. Main catalysts: 1) cross border audit and supervision cooperation negotiation is expected to make progress; 2) China’s economic recovery is better than expected, and policies continue to work hard; 3) There is an inflection point in the epidemic in China.
