Logical Thinking From RMB Exchange Rate To Daily Credit

At the beginning of this year, global financial markets were turbulent.

Although the gloomy outlook for global economic growth in 2016 has long been anticipated, the risk appetite collapsing so fast (risk off) is still beyond the expectation of most people.

Although the reasons for this market turmoil are complex, for example, we are worried about the failure of the marginal effect of long term money volume. Because of the sharp escalation of Japan's interest rate in Europe and the high valuation of the world's main risky assets, the stock market in China has declined significantly since the beginning of the year, and the depreciation of the RMB exchange rate is especially concerned by the market.

President Zhou Xiaochuan's recent speech also talked about the significant increase in China's economic spillover effect on the global market.

In 2016, China's economy will undoubtedly enter the state of policy breakthrough: capacity, leverage and exchange rate.

To capacity and leverage is the government's initiative to push ahead. The exchange rate may be passive, and all aspects of the situation deteriorate and are pushed to this point.

But the most entangled exchange rate is also the eye of all problems.

Exchange rate breakthrough is equivalent to putting China's economy in a more open macro framework.

If a more flexible exchange rate is adopted to eliminate speculators' unilateral bets and become an absorber of economic shocks, China will benefit from it.

But how to replace the currency peg with a more flexible exchange rate? To some extent, we may have missed the right time for a smooth pition.

If a country wants to cancel the pegged exchange rate smoothly, it is only when people have confidence in their economy that people can believe that the exchange rate can be depreciated or appreciated according to the flexible exchange rate.

We once had such an opportunity (restarted in June 2010, to reverse the US dollar in 2014, and the time when the US dollar fluctuated sideways), but now it is different.

The rise of the linkage of financial assets is far from the policy being able to respond calmly, or even lack of basic psychological preparation. Therefore, what we see in the new framework is that the policy takes care of one thing and another, the error increases significantly, and the limitation of control power is gradually exposed. The violent fluctuation of the financial market reflects to some extent a revaluation of the credibility of the policy.

Market fear of medical accidents is more frightening than disease itself.

The expected management of financial policies has always been a weakness in China, so that the market often does not know what the policy intention is to do, and the cost of policy implementation is very high.

In the economic policy communication, the central bankers are important roles. Whether the market expectation can be stabilized ultimately depends on whether they can interact with the market well, simply speaking, whether they can live in the hold market.

In the wake of the reaction, we have generally expressed good intentions for president Zhou's speech.

President Zhou's speech was a frank summary of last August.

Adjustment.

I personally feel the strongest two information: 1, the current RMB formation mechanism is more reference to a basket of currencies pricing, rather than pegging, although the realization of "clean floating" is the future goal of the RMB exchange rate formation mechanism, but at present, the central parity mechanism can not be completely thrown away. Autonomy is in me, simply speaking, there is a managed floating exchange rate system, management is still the key; 2, after the reform will pay more attention to choose the right time window to avoid cross infection between financial markets.

The biggest impact on the devaluation of the renminbi is the private sector (non official) external debt position of $1 trillion and 700 billion.

Devaluation means that this part of the position is deteriorating in finance, leaving us dollar leverage and clearing assets.

If one-off is in place, individual default involving foreign debt will be pformed into a credit impact on the financial system.

But external debt accounts for only 7-8% of China's total debt structure.

I want to understand, in fact, is to protect 90 (domestic debt), that is, to protect 10 (foreign debt) problem.

If this problem can not be understood, it is reflected in macro policy that it is impossible to put the triangle on the map. If we want to implement the loose monetary policy (restrain the upward interest rate and avoid the spiral of debt deflation), we must maintain a liberalized attitude of capital, and try to guide the moderate and orderly depreciation of the RMB (stability) and elasticity.

These three policy directions are contrary to Mundell's three element paradox.

If the central bank has to focus on the exchange rate in the impossible triangular relationship and sacrifice the independence of the domestic monetary policy to some extent, the risk preference of RMB assets will collapse and lead to a global credit contraction. Domestic debt, which accounts for 90% of the total, will eventually be lost, and the economy will eventually slide into the liquidity trap.

Dispel the pressure of current capital outflow

Nothing but: exchange rate in place and capital control.

But in terms of pure technology, no matter what, there is a possibility of worse results in reality than expected.

The root of the problem is to convince the market that China still has enough capacity to guarantee the smooth progress of debt restructuring and economic rebalancing, and to control the systemic risks that threaten the economic security of the process.

This is also the core of the macro Prudential policy framework.

Therefore, in any case, we must adhere to the "take me as the main" strategy, only focus on the independence of the domestic monetary policy, focus on interest rates, strengthen liquidity expectations, and find an appropriate combination of exchange rate and capital terms. Specifically, tight capital controls or inevitable practical choices will create time and space for the exchange rate to release elasticity in the free market.

If China can give effective information to reduce its tail risk (botnet debt restructuring + bank capital restructuring), the expectation of capital outflow and depreciation of the RMB exchange rate will eventually be stabilized.

Interest rates and exchange rates constitute at least an increasingly logical conflict at the expected level. The market strongly believes that the capital outflow caused by the failure to release the pressure of the RMB exchange rate significantly restricts the monetary easing of the central bank, so that it can not support the valuation level of RMB assets at present.

This is the root cause of the turbulence in the capital market.

Sum up four sentences.

It is the center of gravity, the exchange rate is the result, the triangle is settled, and the result will not be bad.

In January this year, the growth of financial credit was relatively fast. Personally, I think there is a certain degree of inevitability.

At present, China has fallen into the spiral of deflation deflation. In this situation, it is not feasible to go to capacity and leverage.

In China, the current financial credit expansion actually corresponds to the fluctuation and pain caused by the government departments' leverage, the core of the supply side reform to the industrial entities, which needs to be ironed out by credit, for bankruptcy liquidation, annexation and reorganization, production capacity withdrawal, capital preparation and opportunity selection.

Guess, next, the urgent need to break the bamboo is to shift the bar department.

China may start to use resolute means to divestiture the zombie debt from the credit financing market, stop lending, and enter the liquidation process of debt restructuring. Of course, this procedure corresponds to the process of fiscal monetization to some extent.

The balance sheets of the central government and monetary authorities must be expanded. Otherwise, the debt rate of the high enterprise departments can not be reduced and the tail risks will be aggregated.

The most favorable conditions for China are: since 2009, the central bank's leverage (the proportion of central bank assets in GDP) has fallen, from 66% high to nearly 19 percentage points, to 47% in 2015.

This has prepared technical conditions for deleveraging.

We may need to get rid of some misconceptions.

The trend of global economic growth is very difficult to go up, interest rates have been sluggish for a long time. Now the efficiency improvement (technological revolution) and the shrinking demand are often parallel. The public debt is hard to be reduced. The history will not be repeated simply. The leverage control in the future may mainly depend on the improvement of the economic mechanism, so as to see who can expand the control limit that does not have systemic risk.

A more legal economy and a more direct financial system can bear higher leverage.

Falling leverage can not be understood literally from literal meaning.

The so-called rule of law is to restrain the behavior and interests of the government. The so-called direct melting is how to increase or increase the money and support the real economy.

This year looks like three things: going to capacity, steady investment and credit, without systemic risk (stabilizing asset prices and bank asset quality).

The point is that monetary policy should be freed from the fetters of the traditional framework, so that covert and decentralized financial debt risks will be explicit and centralized.