Discussion on Chinese MMT:
Officials from the central bank stated at a press conference that China still has room for reserve ratio cuts. In fact, since the beginning of 2024, the expectation of loose monetary policy in China has remained unchanged. The yields of government bonds have been continuously declining, indicating the stability of market expectations. The key issue is the specific monetary policy tools China will adopt. Firstly, regarding short-term interest rate cuts, which involve lowering the rates of open market operations, the market’s fundamental expectation is that this monetary policy tool is constrained by the rate-cutting cycle of the Federal Reserve. So far, in terms of China’s basic capital market performance, this expectation has remained stable, but it will change in accordance with the Federal Reserve’s monetary policy. In mid-2023, the reverse repo and MLF rates were lowered twice in succession, but since September 2023, the reverse repo rate has not been lowered again. During this period, China’s exchange rate experienced significant fluctuations, even showing unilateral depreciation. For the central bank, stabilizing expectations for short-term rate differentials remains quite challenging. After entering 2024, we have implemented structural interest rate cuts, reserve requirement ratio reductions, and reductions in the 5-year LPR. However, we have not lowered the reverse repo rate. In terms of economic data and the performance of the financial market from January to February in our country, the start is promising. After reviewing the monetary policy and economic situation from 2023 to 2024, we will then discuss the discussions in the market regarding China’s monetary policy.
There are voices in the market suggesting that the central bank will enter the secondary market to purchase government bonds, leading to a Chinese version of QE. Regarding this market speculation, firstly, if there is indeed an expectation of a Chinese version of QE, it would mark a significant shift in China’s monetary policy. Observing financial markets worldwide, when a central bank begins purchasing government bonds, it typically also buys other bonds. Meanwhile, short-term interest rates generally reach near-zero levels, injecting liquidity into the market through bond purchases. In other words, it aims to intervene in both long and short-term bond rates, i.e., market rates.
China’s current economic status shows positive first-quarter data, with long-term rates still declining. Concurrently, bond rates for the same term have fallen far below MLF rates. This indicates that China’s monetary supply is sufficient, but the key lies in insufficient demand for money. According to the 2024 government work report, a significant issuance of government bonds has been arranged to regulate the economy. However, will the large-scale issuance of government bonds lead to a rapid increase in long-term bond yields? Currently, the market doesn’t seem to have such concerns, which is a widespread issue.
Firstly, durable goods prices represented by real estate are in a downward trend, and overall local government bond yields, after being endorsed by the central government, are rapidly decreasing. The supply of assets such as ABS in China is insufficient, implying that assets continuously accumulated in the banking system can only be invested in long-term government bonds. In the absence of improvement in other assets, the large-scale issuance of government bonds will not affect yields; it’s a relative process. We believe that only when there are continuous highlights in the economy, with rising consumption and declining savings, will the central bank possibly enter the market to purchase government bonds. And this is a process of recovering from a major illness, where new and old economic forces intertwine.
We do not believe that, under the current stable overall expectations, the People’s Bank of China will embark on the path of QE.
Japan's Issue
This week follows the super week of central banks globally, with no data disrupting expectations of rate cuts. However, there have been sporadic disclosures of economic growth data, particularly the revised data on U.S. GDP growth for the fourth quarter. At this stage, global markets are essentially still in flux. Following the rate cut by the Swiss National Bank, capital markets across the Eurozone experienced rapid gains, while the U.S. dollar index witnessed a rapid surge, but stabilized around 104.5 for the week. Two periods have attracted attention in the global capital markets:
- The yen has depreciated by approximately 4% over two weeks.
- Global gold prices have once again surpassed $2200.
Regarding the first matter, the response from the Japanese Ministry of Finance has been intense. Officials have indicated to the market that this recent depreciation of the yen does not align with Japan’s economic fundamentals; it’s considered short-term speculative behavior. They assert that if necessary, the Japanese government will take proactive measures to address it. In response to this statement, Japan raised interest rates by 10 basis points last week. In classic economic textbooks, a rate hike generally signifies currency appreciation. Furthermore, a currency serves as a representation of a country’s economic fundamentals. In Japan’s case, with the economy gradually emerging from deflation, a sudden significant depreciation of the yen symbolizes market skepticism about Japan’s long-term economic growth, which may be difficult for the Japanese government to accept. Whether Japan can demonstrate innovative capabilities akin to those seen in the 1970s after emerging from deflation is a complex economic question with theoretical possibilities. An environment of continuously rising labor income may encourage young people to embark on paths of innovation and entrepreneurship once again. Apart from the supply side, domestic demand in Japan remains relatively stable. However, due to geopolitical changes, Japan’s share in Western markets may increase. These factors on both the supply and demand sides could potentially facilitate Japan’s phase of growth.
There are also some logical reasons for the bearish view on the yen. Firstly, it pertains to the sustainability of inflation in Japan. Japanese inflation stems from two directions: one is import-driven inflation, and the other is the wage increases resulting from import-driven inflation, which contribute to a wage-price spiral. The wage increase prompted by labor disputes in Japan in March 2024 reached a record level since around 1990. However, domestic demand in Japan remains very weak, with significant pressure from aging demographics, which cannot be alleviated in the short term. Additionally, as global prices fall, import-driven inflation may also decline in sync. Secondly, the sustainability of Japan’s export growth rate is in question. In last week’s report, we discussed that part of the rapid increase in Japan’s exports is due to restocking in the North American market. After the restocking phase, external demand from businesses may end its rapid growth phase. Finally, as Japanese interest rates rise, some bonds are being sold off, and this short-term income outflow may lead to short-term depreciation of the yen.
We believe that this short-term fluctuation in the yen has not altered the overall expectations of the global financial markets. Japan’s gradual move towards restrictive interest rates will remain unchanged, and there is no expectation of the Japanese Ministry of Finance selling off U.S. assets or dollars to purchase yen, which would impact the global capital markets.
Regarding the second matter, the international gold price continues to rise. If we review the trend of the international gold price, the first peak followed the rise of global commodity markets, and then the U.S. dollar index continued to climb, causing gold prices to gradually fall. The U.S. dollar index fell from 113 and then entered a range-bound period of 99-107. During this period, global commodities experienced a downturn, but recently, global copper and other non-ferrous metal prices, as well as gold prices, have seen significant increases. Against a backdrop of stable global exchange rates, inflation expectations, bond yields, equity asset prices, and monetary policy, global commodities have surged significantly, and there seems to be minimal risk exposure to bullishness. One possible explanation is that this reflects pricing for global economic growth.
We believe that the rise in gold prices may be a short-term market behavior and will need to be monitored continuously. A somewhat contradictory point is that major global institutions are bearish on economic growth for 2024-2025, but based on the behavior of global futures traders at present, they are not bearish on future economic growth.
