Despite the sustained pace and magnitude of interest rate increases, inflation in the United States has risen all the way to a 40-year high. Under such circumstances, the United States has to start a new round of table reduction process. Many people predict that the United States may repeat the "Volcker moment". The so-called "Volcker moment" means that former Federal Reserve Chairman Volcker responded to stagflation by raising interest rates from 1980 to 1982, which led to the outbreak of the US debt crisis and two recessions in one cycle.
Will the Volcker moment return, and will there be a severe recession in the US economy? How will the world economy and China's economy be affected? Is it possible for the RMB to "break 7"? Some time ago has been at stake, but in the recent out of a new wave of offensive Chinese stocks are facing a new crisis?
For this series of questions, the atomic think tank spoke to Tian Xuan, vice dean of the Wudaokou School of Finance of Tsinghua University and vice dean of the National Institute of Finance. Tian Xuan believes that the current economic growth is no longer the main policy guidance of the Federal Reserve, the Fed pays more attention to inflation and full employment, and the policy of strongly raising interest rates and shrinking tables will not be implemented continuously. A new round of retrenchment will push long-end US bond yields higher and the stock market will be volatile. In addition, gold and commodity prices have been affected to some extent. The dollar will strengthen. However, Chinese stocks in the policy side, business side, capital side have ushered in a positive, has reached a trend inflection point.
The following is the text of the dialogue.
Atomic think tank: the latest news, the latest research by former US Treasury Secretary Summers and a number of economists shows that the current level of inflation in the United States is closer to the 1980s than the market thinks. For the US to return to core CPI inflation of 2 per cent, it will need Volcker austerity. What do you think of the pace of the Fed's subsequent interest rate hikes and shrinking tables? Will the interest rate hike repeat the strong impact of the Volcker era on the US economy?
Tian Xuan: us CPI rose 8.6% in May from a year earlier, higher than market expectations, and will continue to grow. As a result, market expectations are generally pessimistic and interest rate hikes are expected to heat up again. From the perspective of the Fed's policy objectives, due to the stagflation pressure, economic growth is not the main policy direction of the Fed, and the Fed is currently mainly concerned about inflation and full employment. In the Volcker era, the Federal Reserve took strong tightening measures to deal with high inflation expectations. At present, the Fed has no particularly good measures except to raise interest rates. The Fed is expected to change its dovish attitude soon and send a signal to the market to raise interest rates. However, a sudden sharp increase in interest rates is not expected to be very radical. Instead, it will be gradual, keeping the 50bp rate hike in June and July and raising the basis point to 75bp at the September interest rate meeting in line with changes in inflation and market expectations. Based on the trend of US inflation last year, the rise in inflation is likely to moderate after October. So the Fed is expected to accelerate the shrinking process before September, and then return to a normal pace.
In the Volcker era, high inflation was controlled by forced interest rate hikes and shrinking tables, but at the same time unemployment reached 10.8% and the recession was severe. At present, the Fed is more concerned about unemployment performance and market expectations, so the policy of imposing interest rate deflation will not be sustained. The Fed will make appropriate policy adjustments according to market performance, the market communication is also more adequate, and the market shock should be more moderate than in the Volcker era.
Atomic think tank: since June 1st, the Federal Reserve has launched a shrinking table, which will shrink by $47.5 billion in June, including 30 billion treasury bonds and 17.5 billion MBS. What are the new features of this contraction compared to the last Fed contraction in 2017? How will the contraction affect the capital markets?
Tian Xuan: the Federal Reserve officially launched a new round of retrenchment in June, gradually expanding from $47.5 billion to $95 billion in September. However, compared with the last Fed contraction in 2017, there are some new features in this round of contraction. On the one hand, the shrinking table is facing a more severe external economic situation, including epidemic, political, policy and other factors. In particular, the high level of inflation brought about by the disturbance of the epidemic and the broad monetary policy under the conflict between Russia and Ukraine is the greatest pressure facing the United States at present. At the same time, compared with the good economic growth in 2017, the contraction table is the promotion of monetary normalization, while the current US economy is in recession, and the contraction table is the need for the acceleration of currency normalization. On the other hand, due to the difference of the external environment, the shrinking process is shorter and stronger. The last round of contraction, from October 2017 to August 2019, lasted 22 months and was adjusted every three months until it reached the asset reduction limit of $50 billion a month. AnticipateDue to the demand of monetary policy, the shrinking process is likely to end in a year.
Judging from the previous shrinking history, the shrinking table has a strong impact on the market, resulting in high volatility in the global capital market. The contraction will directly lead to the return of capital to the United States, a rise in risk-free interest rates, higher long-end US bond yields and volatility in equity markets, especially in emerging markets. In addition, gold and commodity prices have been affected to some extent under the liquidity crunch. The dollar will strengthen, which will put some downward pressure on other currencies.
Atomic think tank: how will the Fed's interest rate hikes and shrinking tables affect the world economy and China's economy?
Tian Xuan: the Fed's policy of raising interest rates and shrinking its schedule will further put pressure on economic services and growth. On the one hand, some countries, especially developed countries, will keep pace with the policies of the United States, the world will enter a period of liquidity contraction, superimposed Russian-Ukrainian conflicts, anti-globalization and other situation disturbances, putting pressure on the global economy, which is already in a period of economic downturn. Especially in emerging economies, inflation is serious, under the new policy cycle, the pressure of capital outflow increases, and the risk exposure will be more obvious. On the other hand, this round of interest rate hike and contraction policy is more violent, the spillover effect is stronger, the impact on the capital market will also be more serious, and the possibility of the bursting of the financial bubble will increase, which will have an impact on the global economy.
At present, it is judged that the Fed's policy of raising interest rates and shrinking its schedule will have a limited impact on the Chinese economy. Because fundamentally, the Fed's policy is transmitted through interest rates. However, at present, the economic cycles of China and the United States are not consistent. Although the pace of this round of shrinking table in the United States is accelerated and the scale is large, our country has carried out relatively full risk considerations before, and the policy space is sufficient. Secondly, China's economic fundamentals are still relatively stable. Although the economy is under pressure after the epidemic, it is relatively resilient. In addition, China has a strong resistance to the Fed policy risk input. The linkage effect between A-share market and US stock market is not strong, the foreign position in the bond market is not high, and the risk of capital fluctuation will be alleviated. However, what needs to be vigilant is that at present, China's economy comes from greater internal pressure, and changes in the external environment may intensify risk exposure.
Atomic think tank: compared with the tightening of the United States, China's monetary policy still needs loose and steady growth. Some institutions predict that it is still possible to cut reserve requirements and interest rates this year. What do you think?
Tian Xuan: at present, China's economy is still facing greater downward pressure, in addition to external international environmental shocks and high inflation input pressure, the main reason is the lack of domestic market confidence and weak domestic demand caused by the previous wave of epidemic shocks. Therefore, in addition to the short-period boost, the problem solution needs to be considered from the perspective of a longer period. Including with the advent of the global tightening cycle, increased risk exposure, industrial chain supply chain transfer pressure, as well as the needs of China's economic structure transformation. At present, the macro-policy cycle is in a moderately loose cycle, but the intensity is softer and more stable than the initial period of the epidemic in 2020. In the future, it is predicted that under the circumstances of good epidemic prevention and control and economic recovery within the expected range, monetary policy will continue to cut reserve requirements and interest rates, and it is more likely that aggregate demand will be stabilized by increasing the fiscal stimulus package. However, at present, China's monetary policy space is relatively sufficient, if the economic boost effect is not as expected, the superimposed external shock economic growth continues to be weaker than expected, and the possibility of cutting reserve requirements and interest rates cannot be ruled out.
Atomic think tank: recently, both onshore and offshore RMB exchange rates have hit new highs against the US dollar in nearly a month. There are obviously more voices in the market that the RMB exchange rate is "stable", but not long ago, there were some voices that the RMB exchange rate could break 7% this year. What are the main factors for the weakening of the RMB in the first half of the year? How will the follow-up go?
Tian Xuan: in the first half of 2022, the RMB exchange rate experienced a trend of first strong and then weak, with a strong concussion. The main reason comes from the external economic cycle, the impact of the conflict between Russia and Ukraine and the dual pressure of internal economic fundamentals. The expectation of raising interest rates in the United States is heating up, and the dollar reflects the function of risk aversion under the conflict between Russia and Ukraine, which forms a strong support for the dollar, and non-dollar currencies are facing downward pressure. At the same time, due to the disturbance of the epidemic in the first five months, China's economic boost policy was affected to a certain extent, growth was weaker than expected, and it is normal for the RMB to face adjustment. However, at present, the epidemic has been effectively prevented and controlled, and the downward adjustment of the RMB has also released the expected depreciation pressure of the market. In the future, there is not much room for the RMB to go downside, and the exchange rate will return to the track dominated by fundamentals. In the second half of the year, the policy of stable economic growth will play a role, the domestic industrial chain supply chain will recover in an orderly manner, fiscal stimulus is expected to increase, China's foreign trade exports will maintain their advantages, and the economy will grow steadily. At the same time, under the economic tightening cycle, it is more difficult for European and American countries to grow. Therefore, although the RMB will still fluctuate due to external shocks and short-term epidemic uncertainty in the follow-up, there is a sufficient basis to remain robust in the medium to long term.
Atomic think tank: after the collapse in March this year, Chinese stocks have recently rebounded. The NASDAQ China Golden Dragon Index has risen nearly 30% from its low on May 12. What do you think are the supporting factors for this wave of rise? Have Chinese stocks ushered in an inflection point? What are the important influencing factors at present and what do you think of the follow-up trend?
Tian Xuan: over the past two years, due to the influence of China's anti-monopoly policies, governance of the platform economy, and US regulators' crackdown on US-listed stocks, Chinese stocks have experienced a continuous downward trend, with a maximum decline of 90%. However, since May, Chinese stocks have ushered in a rebound, with Alibaba, JD.com and Baidu all up about 20 per cent. The specific reasons are as follows: first, after nearly two years of anti-monopoly and other supervision, the risk factors of US-listed stocks have been clarified, based on the needs of economic restructuring, the policy side has been adjusted, and digital economy and platform enterprises have ushered in a favorable situation; second, the excessive crackdown on US-listed US stocks will also have a negative impact on US stocks themselves, and China and the United States have made positive progress on the new regulatory framework. Third, the latest disclosure of the performance of Chinese stocks, Chinese stocks themselves have a higher investment value, capital profit-driven attribute will eventually flow to these high-growth enterprises. At present, Chinese stocks in the policy side, business side, capital side have ushered in a positive, indeed ushered in a trend inflection point. In the future, US-listed stocks will be mainly affected by macro fundamentals and the company's performance itself. At the macro level, in order to stabilize the economy and adjust structural demand, policies will steadily support the development of digital economy, especially in the part of encouraging enterprises to innovate. China's economy will also gradually return to steady growth under the background of weakening epidemic uncertainty and sound macro policies. On the other hand, after the business adjustment, the risk point is reduced, and the new business direction is gradually developed. For example, JD.com invests in the completion of warehousing and logistics and is closely integrated with China's real economy. Meituan gives full play to the advantages of the platform and plays an important role in the consumer side. I believe he will achieve a good performance.