Xue Hongyan: The world is raising interest rates, why is China cutting interest rates?

Source: First Finance

Author: Xue Hongyan

Since June, China has entered a new round of interest rate cuts, deposits and interest rate cuts (June 8), OMO/MLF interest rate cuts (June 13, 15), LPR interest rate cuts (June 20), etc.The piece set runs almost throughout June, and has attracted much attention from the market.In this context, a problem has surfaced again, that is, in the environment of raising interest rates worldwide, why is China cutting interest rates?

Taking the 10 -year Treasury yield as an example, from 2021, the US debt yield has increased from a minimum of 0.93%to a maximum of 4.25%, and it is currently shocked near 3.7%.The lowest is 2.61%, and it is currently shocking near 2.7%.

The departure of the China -US monetary policy involves two layers of "should you do" and "Can you do".

Should it be done, refers to the tightening of the monetary policy or the looseness depends on the stage of the domestic economic cycle. When the stimulus should be reduced, the interest rate is reduced; when the tightening should be tightened, the interest rate hikes.

Whether to do it means that the interest rate cuts stimulate the economy, but is limited by a series of constraints and can maintain the independence of monetary policy.For example, whether you can choose to cut interest rates when raising interest rates in the United States, or choose to raise interest rates when US interest rates cut.

Analysis from these two meanings, China chose to cut interest rates when raising interest rates around the world.Should you do it?It should be done, because the domestic economy is relatively low, the CPI is at a low position, and the enthusiasm is weak in financing, and it needs to cut interest rates to stimulate the economy.Can you do it?Obviously I can do it because I have done it.

The reason why it can go around with the Federal Reserve is because China has achieved the independence of monetary policy by abandoning a fixed exchange rate and retaining a certain capital account control.

This sentence is not easy to understand, you need to start with the global monetary system.

As a global currency, the wind policy direction of the Fed's monetary policy is to a certain extent on the flow of global capital.When the Fed chose to raise interest rates, global capital will return to the United States to obtain higher interest income.At this time, in order to reduce the pressure of capital outflows, non -US countries usually choose to raise interest rates simultaneously and use higher interest to retain funds.For example, if the US interest rate is given 4%, I will give 4.5%, the United States raises hikes 25bp, and I also raise interest rates 25bp. In this case, there is no need to return to the United States.

Of course, it is also negative.If the economic cycle of the two countries is not synchronized, the United States needs to raise interest rates, and the country actually needs to cut interest rates.At this time, he was forced to follow the interest rate hike when he raised interest rates. Although it could relieve the outflow pressure of funds, it was worse for the domestic economy.If there are fragile factors in China, such as severe asset price bubbles, following the interest rate hike may pierce the bubble, which will cause the economy to change from overheating to crisis, and funds will still flow sharply.In a sense, this is the so -called cutting leeks by the US dollar.

Therefore, maintaining the independence of monetary policy can hold the autonomy of domestic economic development in your own hands, or can fundamentally reduce the risk of cutting leek by the United States.

To maintain the independence of monetary policy, the key is to effectively respond to the pressure of capital outflow when the monetary policy is dislocated.When a country choosing to reduce interest rates in the United States, it is bound to face the pressure of capital outflow. This is the current situation in China.The outflow of funds will lead to the depreciation of the local currency, and the contradiction will come out. Either restricting capital outflows, that is, to control the capital account, or let the local currency depreciate, that is, the abandonment of the fixed exchange rate system.

At present, China has implemented a management floating exchange rate. The exchange rate is floating, but it is not entirely dominated by the market. If necessary, the central bank will also call to end and guide the exchange rate to fluctuate in a reasonable interval.At the same time, China's capital account is not a complete free flow, which also avoids the impact of capital into the exchange rate on the exchange rate.

With the above conditions, China has the foundation and confidence of implementing independent monetary policy.If you solve the problem of whether you can, there is only a problem that should be left.At present, China's economy needs to cut interest rates, so it is better.

However, economic decisions do not go extreme.Although China can maintain the independence of monetary policy, this independence is usually costly at the cost of fluctuations in exchange rates and the loss of foreign exchange reserves, which is costly.Therefore, in the actual situation, the influence of the Federal Reserve ’s interest rate hike will still be considered and this impact will be reduced.In other words, in the Federal Reserve's interest rate hike cycle, the rhythm of the People's Bank of China is also subject to some restrictions. It will be reduced but more willing to achieve the effect of restricting interest rate cuts through some structural tools.

According to the definition of the central bank, structural monetary policy tools are tools for the People's Bank of China to guide financial institutions to invest in credit direction, exert accurate drip irrigation and leverage to leverage.The fields and industry credit offering reduces corporate financing costs.Compared with general loans, structural monetary policy tools can achieve accurate interest rate reduction effects on specific fields, better achieve the purpose of credit regulation, and avoid the unprepared impact of global interest rate cuts.

According to public data statistics, from 2020 to at the end of 2022, more than 20 items for structural monetary policy instruments or structural characteristics used by the central bank or structural characteristics, the scale of liquidity is about 3 trillion yuan.Funding is more than 10 trillion, which has become an important liquidity launching tool.

In June 2023, the Federal Reserve's June interest rate interest rate hikes were suspended. The market generally estimated that the Fed ’s interest rate hike cycle has entered an ending stage.Also in June, China started a new round of interest rate cuts, and the market expects to cut interest rates in the second half of the year.Obviously, after the restrictions of the Fed's interest rate hike, China's monetary policy has even been released.

In fact, China has been in the interest rate cut cycle since Q4 2019.MLF is the core policy interest rate tool and the core driving factor for LPR adjustments.Since 2019Q4, the MLF interest rate in one -year borrowing convenience has entered a decline channel, from 3.3%to 2.65%.

Therefore, from the perspective of cycle, China has already entered the interest rate cut cycle. Considering the amplitude and time span of cumulative interest rate cuts, it may be reduced by 1-2 times in the future, but this round of interest rate cut cycles are also close.

On the one hand, from the perspective of maintaining a reasonable interest difference between banks, interest rates have almost reduced.Each time the interest rate is reduced, although the deposit and loan interest rates are reduced, the deposit interest rate will be reduced to accelerate the regularization of deposits, resulting in a decline in the average deposit interest rate lower than the decline in the average loan interest rate, and the net interest margin of banks is compressed.2019Q4-2023Q1, the net interest margin of commercial banks fell from 2.2%to 1.74%.2023Q1, the proportion of non -performing loans in Chinese commercial banks is 1.62%, indicating that 1.74%of the net interest margin has been reduced.

On the other hand, at present, interest rates are already at a low level, the demand for financing in the real economic department is sluggish, and interest rates are no longer the core decisive factor.That is, enterprises and residents are unwilling to borrow, not because of high interest rates, but because they are unwilling to borrow money at all.

As far as the residential department is concerned, the interest rate of the housing group has a high interest rate of the housing loan, and the mortgage is repaid in advance; the unpopular group is delayed to buy the house because of the decline in housing prices.As far as the enterprise department is concerned, domestic demand is weak, the external demand has weakened, the superimposed inventory cycle has not yet been found, the willingness to invest is sluggish, and they are unwilling to borrow money to invest.

At this time, it is not of great significance to continue interest rate cuts, which will also affect the sustainable development of commercial banks.Therefore, even if it needs to be stable, the interest rate reduction will be reduced in the second half of the year, but it will be reduced by more than 1-2 times.

By then, if the domestic economy will still be sluggish, it will need more fiscal policy and the monetary policy will remain loose; if the economic recovery power will rise and go out of the bottom, China is expected to enter a new round of interest rate hikes.