Demolishing foreign exchange? Protecting foreign exchange—— The true logic within the recent central bank decision-making framework

5month25Today, the trend of the RMB exchange rate, which serves as the anchor for China's major assets such as foreign exchange, housing, bonds, and stocks, has once again become the focus of attention for all domestic and foreign financial media and industry professionals.
24According to a report by The Wall Street Journal3At a closed door meeting of the People's Bank of China, some domestic banking executives and economists demanded that the central bank stop fighting against the market and allow the renminbi to depreciate. However, central bank officials believe that maintaining stability is the top priority in the near future.25Recently, Bloomberg reported that Chinese officials are attempting to confirm through official channels whether the Federal Reserve will6Raise interest rates on a monthly basis in order to better respond to exchange rate and other policies. At the same time, China has prepared to respond to the Federal Reserve6A plan for the potential impact of monthly interest rate hikes on the market and RMB exchange rate. Meanwhile,25On the same day, the central bank set the midpoint of the Chinese yuan against the US dollar at6.5693The lowest level in five years.
In China, the foam of the first and second tier real estate is still high; Rumors of differing opinions within the government; The credit bond market is in a state of panic; Under the pressure of supply side reform, the non-performing loan ratio of banks continues to rise; The estimation report on non-performing loan losses in the domestic banking industry from both domestic and foreign sources is also fueling the fire. In its research report, Industrial Bank stated, "The estimated non-performing loan ratio of the entire banking industry is..."15%The total amount of non-performing loans is approximately15Trillion, equivalent to2015yearGDPof22%The total assets of commercial banks7.5% ”Amidst the recent economic turmoil in China, everyone is secretly questioning whether the Chinese economy can no longer withstand it?
Abroad, at the economic level, the US Department of Commerce4Monthly sales of new homes increased month on month16.6%Create24The data with the largest monthly growth rate in the past year; Goldman Sachs plans for the second quarter of the United StatesGDPThe expected growth rate has been raised to3.0%Their actions; Investment banks at home and abroad7The probability of the Federal Reserve raising interest rates in the month is as high as54%The general prediction is to once again influence market sentiment through public opinion to build momentum for the US dollar. At the geopolitical level, the European Parliament voted against China's market economy status; Obama visits Vietnam, arms embargo lifted;G7Before the meeting, Abe believed that China's proposal of "a broad Pacific with enough space to accommodate the two major powers of China and the United States" was a "hegemonic" statement, which was also widely circulated and seemed to have a high possibility of China being isolated from the world in domestic and foreign public opinion.
Amidst people's anxieties, the pressure from the United States has intensified, and the central bank has lowered the central parity rate of the Chinese yuan against the US dollar to5The statement that the central bank will abandon the exchange rate and protect domestic assets has become the core of public opinion and discussion due to the new low of the year. For this problem, our group will focus on the relationship between exchange rate foam and asset foam; Huifang Bond Stock is the inherent logic of the current central bank policy framework; Under the game between China and the United States, the measures of the People's Bank of China will be briefly discussed in three aspects.
First, the relationship between the exchange rate foam and the asset foam is formed by the domestic and foreign industrial policies dominated by export and real estate in the past two decades. Through the marketization of housing, the development of the real estate industry has been promoted, resulting in the formation of super land rent. Not only has it launched a pillar industry in China, but the government has also utilized the land economy dividend sharing mechanism and tax rebate mechanism to join ChinaWTOAll dividends obtained from the global market will be recovered and used for fixed assets investment, creating two major domestic and external recycling systems and a direct fiscal and tax recycling mechanism.
The sharp rise in the asset sector under the super rent model has triggered an inflationary wage increase, raising the overall wage level. Based on the power mechanism of the domestic government, around the super land rent, the government has built a land economic dividend sharing mechanism, a tax rebate mechanism, and an asset foam wave with the super land rent as the core, which has triggered long-term domestic wage inflation and raised the overall wage level. Under the characterization of a strong export sector, the trade surplus advantage supported by Chinese style price distortions is directly reflected in the significant appreciation of the RMB exchange rate, resulting in a single exchange rate corresponding to export efficiency but not the overall efficiency of economic development. This leads to a serious overvaluation of the RMB exchange rate, and the relatively high wages and a decrease in actual purchasing power of China caused by the external rise and internal depreciation of the RMB.
Under the above industrial system, land economic dividend sharing mechanism, and tax recovery mechanism, exchange rate foam and asset foam are mutually reinforcing; The core support to re-establish industrial competitiveness may come from the elimination of asset foam within the controllable risk range; Or from the return of the RMB exchange rate to the global general equilibrium state; Or from the adjustment of domestic wages and benefits to improve production efficiency and match wages and benefits; Or it may come from the improvement of efficiency in non trade sectors, beyond which there is nothing else. In such realistic situations as the government with unlimited responsibility and the rigidity of the system, the aging trend of the domestic population and the gap between the rich and the poor, the lack of domestic contract spirit and the strong sense of individual risk aversion, the instantaneous consistency of information transmission and herding effect in the Internet era, the four major issues are intertwined and interacted with the domestic reality, forming a Mobius ring that seems difficult to get out of. In the current situation where global mid-term demand is at its peak, economic growth engines are lacking, and countries are playing a game of stock, the background conditions and real environment of internal and external factors have prompted the government to prioritize the policy of delaying consumption and competition. Radical reformers often become the first to be eliminated. The exchange rate foam and asset foam formed due to historical reasons, such as the non-government resources are difficult to maintain, or the Black Swan event broke out, the gradual policy based on "stability" is the most attractive for the government in a short time.Foreign exchange gold
Secondly, from a longer-term perspective, the reform design logic of debt protection, stock opening, foreign exchange depreciation, and housing pressure is more in line with the requirements of China's supply side reform and economic transformation and upgrading. However, due to2016At the beginning of the year, the dual kill of exchange rate and stock linkage (of course, the contribution of circuit breaker mechanism should not be underestimated) caused a huge impact on the stability of the bond market, forming a risk transmission chain of exchange rate depreciation expectations, stock decline reality, as well as debt concerns and housing price declines; In order to avoid systemic risks caused by the linkage between foreign exchange and stock markets and to cut off the risk transmission chain, the central bank's operational strategy in the first quarter was adjusted to stabilize foreign exchange (accompanied by capital controls, the trilemma)/Mondale (impossible triangle), daycare room（2month2The new real estate policies of Japan and15The policy revision logic includes a series of policies for the year, debt protection, and stock abandonment (allowing the market to adjust itself).
However, the choice to abandon stocks and the high level of credit bonds have made high-quality asset options more scarce in China. The housing prices in the first and second tier cities in China in the first quarter soared beyond the expectations of policy designers and regulators, driven by the expectations of capital preservation and appreciation, people's fear of monetary inflation, arbitrage in the corporate policy window, the choice of government path dependence, Internet information consistency and the impulse of herd effect, and other factors. The control of the real estate foam and the avoidance of its burst in a short period of time to form an uncontrollable chain reaction become the core of policy repair; However, the real estate foam expanded again, forming a greater crowding out effect on the weak manufacturing system, increasing the dissatisfaction of the whole society, losing the prestige of the government, and further weakening the resources that the government can allocate.
The mismatch between the original intention of policy formulation and the expectations of market people has gradually formed the current predicament under the impact of capital arbitrage. The current outcome has already been formed, and regret and verbal abuse are of no use. Ranked according to the severity, severity, slowness, and urgency of the situation, the biggest and most urgent impact on the operation of the government system and the economy in China is still the replacement of local bonds.

[li]
Local bond replacement2016The most crucial task before the third quarter of this year: According to data released by the Ministry of Finance,2016Annual completion required6Trillion yuan local bond exchange and new issuance of local bonds1Trillion, total7trillion according towindData, as of5month24The issuance volume of local bonds in Japan has reached2.28Trillion yuan, close to the annual circulation38%. Among them, replacement bonds are mainly used, accounting for a proportion94%; The proportion of newly added bonds is6%. According to the requirements of the Ministry of Finance at the beginning of the year, local bonds need to be replaced before the third quarter70%The above proportion, the time is almost half, and the completion progress is only37%。[/li]

The replacement of remaining local bonds has faced increasing concerns about domestic inflation, rising bad debt rates and affordability of banks, and the suspension of debt to equity swaps; Under the trend of supply side reform, the game between banks and local governments will further escalate. Due to the pressure of funding supply still concentrated in commercial banks, targeted replacement bonds lack liquidity; With the existence of the RMB exchange rate foam and capital control, overseas capital lacks sufficient interest in local debt. In order to reduce the impact of the bond market deadlock on entities and financial institutions, and to lead to insufficient local government resources and system failure, and to lack means to respond to sudden risks, increasing the willingness of banks to replace and ensuring stability remains the core of short-term policy formulation. Therefore, stabilizing foreign exchange, protecting debt, suppressing housing (with some holding pressure), and abandoning stocks are the normal choices of this strategy. But the sudden interest rate hike expectation from the Federal Reserve seems to be disrupting the central bank's deployment.
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