Monetary Policy Implementation Report For The Third Quarter Of 2016 Provides Guidance For Economic Development

Since 2016, China's RMB exchange rate has depreciated sharply, but at the same time housing prices have been rising too fast, thus triggering the controversy of "abandoning housing and remittance" and "abandoning foreign exchange and protecting housing".

In the report of this quarter, the central bank explicitly mentioned in the "3 column economic operation, monetary policy and structural adjustment" that neither of them is desirable.

The former will lead to "crisis passive leveraging", which will lead to "exacerbating structural distortions and debt accumulation, resulting in a longer and more costly adjustment".

For the exchange rate, the RMB exchange rate has seen a significant depreciation. The current RMB exchange rate has returned to 2010, and the exchange rate risk has been fully released. The central bank obviously does not have the rigid intention of "keeping the exchange rate". Although the central bank has intervened partially in the exchange rate market, the degree of intervention is becoming lower and the depreciation is becoming more and more full. Otherwise, it will not depreciate 10% in one year, which is unprecedented in Chinese history.

From the international and domestic experience, housing prices and exchange rates are often the same direction rather than reverse, which is consistent with the basic logic of economics.

In the period of economic prosperity, housing prices tend to rise and exchange rates appreciate. On the contrary, in the recession stage, house prices tend to fall and exchange rates depreciate.

To get rid of the embarrassing situation of the current exchange rate depreciation and the excessive rising of housing prices, the most critical way is to adjust the economic structure, promote the steady and rapid growth of the economy, and slow down the long-term financial risks.

That is to say, only sustained economic growth can slow down two risks at the same time, and it is also the best way out for the current situation.

In November 8th, the central bank issued the report on monetary policy implementation in the third quarter of 2016.

The following are the following:

1, from "continue to implement a prudent monetary policy" to "adhere to the implementation of a prudent monetary policy", emphasizing that monetary policy keynote has not changed.

We believe that "prudent monetary policy" does not mean "constant monetary policy". Monetary policy only changes with the economic and financial situation is truly "robust". The central bank's monetary policy implementation report in the three quarter also highlights many changes in monetary policy.

2, the "steady growth" weight decreases, and the "risk prevention" weight rises.

In the report, a rare 7 mention of the word "bubble" was made, and for the first time, the formulation of a balance between "steady growth and anti foam" proved that the focus of our monetary policy changes.

Among them, the "bubble" is mainly concerned about the real estate bubble, but the financial system risk is not limited to the real estate market.

3, for the first time, emphasis is placed on the term mismatch. Explanations for the tight capital market in September and the 14 day and 28 day reverse repurchase were carried out. For the first time, it was put forward that "the risk of rapid expansion of trading volume in the short term and the short duration of trading terms should be emphasized."

The financial strain we put forward is that the central bank intends to do it, "liquidity inflection point" and the time mismatch cost rise.

4, a positive response to the "abandoning housing security remittance", "abandoning the remittance room" controversy, the report considers neither is desirable.

The controversy about exchange rate and house price is a false proposition in essence. The premise is that there is a bubble in real estate and exchange rate, but this premise does not exist.

What we really need to do is to guard against the real estate bubble, avoid monetary policy being too tight or too loose, match the economic and financial situation, and adhere to the genuine "prudent monetary policy".

For the bond market, although the central bank has never expressed concern about the bubble of the debt market, the focus of monetary policy has shifted from "steady growth" to "risk prevention", emphasizing the risk of time mismatch, improving the volatility of the money market, and reducing the availability of low-cost funds such as overnight.

Detailed explanation is as follows:

Recently, monetary policy has gradually become the focus of attention of the government and the market.

In October 28th, the "monetary policy" part of the Central Political Bureau meeting did not mention the content of "steady growth". At the same time, it emphasized for the first time in the "monetary policy" part "emphasizing the suppression of asset bubbles and preventing economic and financial risks". In October 30th, the Chinese government website published the article "people's Daily Overseas Edition" entitled "China's monetary policy key words are still steady". The article pointed out: "the key words of China's monetary policy are still sound, and the old and new power conversion period" has no basis for speculation. "

These two statements seem contradictory, but the two are essentially the same.

In our October 30th article, does "prudent monetary policy" mean that there is no "liquidity inflection point"? It is put forward that "prudent monetary policy" does not mean "constant monetary policy". Monetary policy, which follows changes in the economic and financial situation and changes accordingly, is called "prudent monetary policy".

In this article, we propose that, as the economic and financial situation has changed in 2016, the central bank should make four changes in order to maintain "prudent monetary policy": first, the weight of the "steady growth" of monetary policy has decreased, and the weight of "risk prevention" has increased; the two is that the cycle of "lowering interest rates" has basically come to an end; three is to moderately increase the interest rate volatility of money market and the turning point of liquidity; and four, it is necessary to include the management of both external and external financial affairs in the scope of macro Prudential policy.

In combination with the three quarter monetary policy implementation report, our above four points have been fully verified.

For the first time, the central bank put forward the "balance between steady growth and risk prevention". The 7 time mentioned the "bubble" and reduced the cost of financing again and again. It was the first time to propose that the term mismatch should contain risks. It is clear that the central bank's intention to make financial fluctuations since September is clear that the bank's off balance sheet financing will be included in the MPA supervision in the future, which is consistent with our prediction.

For the bond market, all factors are bad at the moment, and the central bank has made it clear that it is necessary to attach importance to the risk of "maturity mismatch", and the term mismatch is the key to the downtrend of bond yields.

We continue to emphasize the "risk prevention" of the bond market and firmly look at the Chinese bond market.

In the report of this quarter, the central bank did not follow the expression of "continue to implement a prudent monetary policy", and for the first time adopted the expression of "adhering to a prudent monetary policy".

We note that since the implementation of the current prudent monetary policy in 2011, its expression is "implementing a prudent monetary policy" (the first quarter of 2011 and 2012) and "continuing to implement a prudent monetary policy" (2012 and after). This time, for the first time, the "prudent monetary policy" was adopted, and its tone and emphasis were higher than before.

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We believe that the central bank's emphasis on "adhering to a prudent monetary policy" is a response to the recent discussion on the turning point of the central bank's monetary policy.

Recently, the market has more references to the inflection point of the central bank's monetary policy, but it often differs from the context and connotation of the central bank and the central bank. Therefore, it is necessary for the central bank to emphasize the continuity of its monetary policy keynote.

But as we put forward in the paper that "prudent monetary policy" means no "liquidity inflection point", "prudent monetary policy" is by no means an "invariable monetary policy". The connotation of "prudent" is that monetary policy needs to conform to the prevailing situation of China's economic integration.

Recalling that in 2010, the central economic work conference set the tone of "prudent monetary policy", it has experienced 2010-2011 years of "quasi plus interest increase", the 2012 "quasi reduction of interest rates", the 2013 "money shortage", 2014-2015 years of "quasi reduction of interest rates", and 2015-2016 years of depreciation of the RMB, all of which are consistent with the "prudent monetary policy" because the changes in these monetary policies match the changes in the economic and financial situation.

Since 2016, new changes have taken place in China's economic and financial situation. There are obvious signs of bottoming up in economic growth. Inflation CPI is rising gently, PPI is rising rapidly, real estate bubble prevention has become the focus, and the importance of risk prevention in financial market has been enhanced. Monetary policy needs corresponding changes.

In the three quarter monetary policy implementation report, we can clearly feel that the same is a "prudent monetary policy". The central bank pays more attention to "preventing risks" instead of "steady growth". The 7 time emphasizes the word "bubble", putting forward the risk of "time mismatch" for the first time and putting forward "maintaining interest rate elasticity" for the first time. These changes are not only the specific content of our "monetary policy inflexion", but also the connotations of the "prudent monetary policy" of the government and the central bank.

In this quarter's report, the central bank has been very optimistic about economic growth.

The central bank has mentioned in many places, including the summary, that "positive changes have increased", "especially since the three quarter, the economic recovery has accelerated", "the economic operation is generally stable, and the structural adjustment has shown positive changes". These expressions are positive and positive, and are more optimistic than the 2 quarter's "economic overall smooth operation, pfer mode and structural adjustment steadily".

We believe that the inflection point of the economic L has passed, and the weight given to the "steady growth" in the central bank policy will be reduced.

On the other hand, in the current quarterly report, the central bank's emphasis on "reducing financing costs" has dropped significantly, which has also proved the weight of "steady growth" on the other hand.

It is worth noting that in the 1 quarter report of 2016, the central bank also mentioned in the summary part of the "guidance cost of financing downward". In the 2 quarter report, the central bank has only mentioned the cost reduction issue under the title of the second level monetary policy operation.

In the 3 quarter report, the central bank only mentioned the cost reduction problem under the two sub heading.

It can be seen that the weight of the policy goal of reducing the financing cost of the real economy is constantly decreasing in the central bank's current monetary policy orientation.

We believe that the reason for this decline is also because the L inflection point of the economy has passed and the demand for steady growth has been reduced.

On the contrary, in this quarter's report, the emphasis on risk prevention is on the rise. For the first time, the balance between steady growth and anti foam is put forward.

For the first time, the central bank has mentioned in the summary and the outline of the next stage of monetary policy thinking: "while maintaining a reasonable and abundant liquidity, we should lay stress on inhibiting asset bubbles and preventing economic and financial risks". Instead of mentioning the "systemic financial risk" only in the last paragraph of the report, on the one hand, it has upgraded the concept of risk prevention, encompassing all economic and financial risks, and on the other hand, enhanced the position of risk in the implementation of monetary policy.

The change of the central bank's monetary policy report is consistent with the meeting of the Central Political Bureau.

Looking back at the "monetary policy" part of the past 2014-2015 years' meetings of the Central Political Bureau, mainly emphasizing "supporting the development of the real economy" and "paying attention to the pmission channel of monetary policy to the real economy". In October 28th, the "monetary policy" part of the central political Bureau meeting did not mention the content of "steady growth". Instead, it stressed for the first time in the "monetary policy" part "emphasizing the suppression of asset bubbles and preventing economic and financial risks".

It can be seen that the same is a "prudent monetary policy", and its focus has been very different from that in the past 2014-2015 years.

The three and 7 mention of asset price bubble, real estate is the main concern of the bubble.

The central bank paid much attention to asset price bubbles.

Combing the previous reports on monetary policy implementation, we find that in the past monetary policy implementation reports, the central bank generally only objectively expounded the bubble issue, or commented on asset price bubbles under the policy of overseas central banks.

However, since the 2 quarter of this year, the central bank has given extra attention to the bubble issue.

In the 2 quarter of the central bank, the central bank first mentioned that "suppressing the asset bubble and reducing the macro tax burden" is the two level sub heading of the macroeconomic outlook under the fifth part of the "monetary policy trend". But let's look at the implementation report of the 3 quarter. The seven parts of the central bank in the abstract and the next stage of the policy thinking framework explain the asset price bubble problem.

We speculate that real estate is the main concern of the central government and the central bank on the bubble problem.

In the central bank's monetary policy implementation report column 3, "economic operation, monetary policy and structural adjustment", China's "housing assets scale has reached two times the size of financial assets", "the relationship between economy and real estate is more closely", "the real estate cycle and economic cycle are linked together, and real estate has also become an important factor affecting income distribution".

This shows that the central bank attaches great importance to the impact of the real estate cycle on the economic cycle.

From the international experience, even if the stock market, commodity and bond market bubble exists, there will be no disastrous consequences for the economy and finance. There are only two real serious ones. One is real estate, the other is exchange rate. The common characteristics of both are debt crises. Real estate is the national debt crisis, and the exchange rate is the foreign debt crisis.

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Since 2016, the price of real estate has been rising rapidly. Although its rise has such objective reasons as large urbanization and insufficient supply of land in second tier cities, it has become a problem that the government must consider and attach importance to preventing its bubble. This is precisely the central reason why the central bank will "patiently" emphasize the asset price bubble in the implementation of this monetary policy report.

10, in the middle of the month, the money market continued to be tight. At that time, many market views were due to factors such as tax payment and foreign exchange outflow. We insisted that "any country's money market interest rate is directly controlled by the central bank. If capital continues to be tight, it shows that the central bank's attitude has indeed changed".

(see the report, "it is impossible to expect the mother of the central authorities to dote on" and "bear the debt of the bull" unavoidably). Author: Deng Haiqing, Chen Xi)

The implementation of the monetary policy report confirms our view that the central bank recognised the central bank's intention to make money market volatility, and for the first time raised the risk of "maturity mismatch" and gave a clear explanation for the 7 day and 14 day reverse repurchase.

The following points need to be followed closely in the monetary policy implementation report:

1, since September, interest rate elasticity has increased, reflecting both the fundamentals of the economy and the seasonal variation, and reasonably reflects the liquidity risk premium.

2, "the central bank's 14 days and 28 days of reverse repurchase can provide more choices for the market, promote financial institutions to optimize liquidity management, rationally manipulate the term structure of assets and liabilities, thereby improving the stability of the banking system's capital and enhancing the resilience of the money market to liquidity fluctuations."

3, "the risk of rapid expansion of trading volume in the short term and the risk of trading over the short term should be emphasized.

Appropriately extending the duration of capital supply will help to guide commercial banks to improve their liquidity management level, reasonably arrange the total amount and term structure of assets and liabilities, and prevent asset liability maturity mismatch and liquidity risk.

4, "on the one hand, we should pay more attention to stabilizing short-term interest rates, exploring the construction of interest rate corridors, stabilizing market expectations, dredging the pmission mechanism, and on the other hand, we need to maintain interest rate elasticity in a certain range, match with changes in economic operation and financial market, and play a role of price adjustment and guidance."

The plation of the statement of the central bank is that even if China implements the price control mechanism in the future, the interest rate of money market must maintain a certain volatility. It is more straightforward to say that the central bank will not maintain the fixed interest rate in the money market, and provide conditions for adding leverage and mismatch.

The position of the central bank is the first time since 2014 that it answered a fundamental question that plagued the market: whether the central bank controls interest rates and fixed interest rates on the central bank. From the international experience, the interest rates in the US and Europe show obvious low volatility characteristics, that is, a very small narrow fluctuation around the central bank's benchmark interest rate. The purpose is to enhance the effectiveness of the central bank's monetary policy benchmark interest rate and promote the pmission mechanism of monetary policy price.

We have always maintained that China's price regulation may not be a simple duplication of the US and Europe. China's unique leverage plus interest rate model does not support the excessive stability of money market interest rates.

The central bank's monetary policy implementation report gives a clear answer. "On the one hand, it pays more attention to stabilizing short-term interest rates, exploring building interest corridors, stabilizing market expectations, clearing pmission mechanism, and maintaining interest rate elasticity in a certain range, matching with economic operation and changes in the financial market, giving full play to price adjustment and guidance".

Moreover, in the part of the report on monetary policy implementation, there is another point to note: DR007 may become an operational indicator of the central bank's monetary policy.

The central bank said, "the 7 day period repo rate of interest rate bonds (DR007)" can be reduced by the interbank market deposit institutions, which pledge interest rate bonds as a pledge. It can reduce the disturbance of the counterparty's credit risk and collateral quality on interest rate pricing, which can better reflect the liquidity tightness of the banking system and play a positive role in fostering the benchmark interest rate of the market.

There has been controversy over the operation of the central bank's money market. The main targets include SHIBOR, R001 and R007. The central bank put forward the positive role of DR007 for the first time. It is reasonable to speculate that the operation index of the central bank's money market may be DR007..

The significance of the central bank's monetary market operation index is that the central bank's monetary policy operation can be predicted according to the change of the index. If DR007 remains stable and R007 fluctuates greatly, the central bank may not take too many measures. Once the DR007 fluctuates significantly and R007 stays stable, the central bank will have a much higher degree of regulation on the money market.

For the bond market, although the central bank has never expressed concern about the bubble of the debt market, the focus of monetary policy has shifted from "steady growth" to "risk prevention", emphasizing the risk of time mismatch, improving the volatility of the money market, reducing the availability of low-cost capital and the obvious bad interest bond market, so we firmly look at the Chinese bond market.

"Hai Qing FICC channel" believes that "three mountains" heavy pressure on the bond market, bonds are inevitable to bear.

First, economic stabilization and recovery, the two is upward inflation, PPI pressure increases; three, financial system risks continue to accumulate, the central bank liquidity inflection point is now.

According to the "revised Taylor rule" and "solar system theory", all factors are totally bad.

At present, the "asset shortage" has become the only belief in the long bond market. But as long as the liquidity point of the central bank appears and the fluctuation of capital surface increases, the added leverage and maturity mismatch mode of the bond market will not be followed. The return on asset side will go up with the upward interest rate of the capital side.

Looking back in 2013, the capital side and the central bank are the key to the big adjustment of the bond market. At present, the core contradiction of the bond market is very similar to that of that time. Investors should guard against the trap of the bond market.

For the stock market, Hai Qing FICC channel has long been optimistic about the fundamentals driven long-term healthy bull market in China's stock market, and the central bank's liquidity margin has tightened up at most to increase stock market volatility.

From the experience of June 2013 and September, the disturbance of liquidity may lead to short-term fluctuations in stock market, but it will not change the trend of stock market.

We hope that the main reason for this round of healthy bull market in China's stock market is the second half of the economic L, and the improvement of corporate profits is fundamentally different from that of buffalo, which has been overly dependent on monetary policy for 2014-2015 years.

The change of liquidity may lead to short-term fluctuations in stock market, but it will not change the trend of long term healthy bull market.