In the past two years, the change of RMB value has been the focus of market attention. Relatively speaking, the opinions of foreign speculators fluctuated rapidly, from 20 14 to the first half of 20 17, to the second half of 20 17, and then to the present relative neutrality. To sum up, there are three main angles: the theory of financial system collapse, the theory of currency overshoot and the theory of overseas diversification. The collapse theory mainly stems from the concern about China's leverage level, the over-development theory takes M2 as an example, and the overseas investment theory is based on the spontaneous global allocation of China residents' financial assets.
In the short term, because of the huge foreign exchange reserves and the lack of a fully open capital account, the value of the RMB is still controllable, but this is obviously not everyone's greatest concern. The author tries to analyze it from three angles. In the medium and long term, the trend of RMB may not be as weak as expected by the above three arguments, and every argument can find counterexamples. The author summarizes these three angles as RMB interest rate, currency and belief. Corresponding to the above three arguments, it can be understood as the corresponding allocation of interest rates, the corresponding surplus of money and the corresponding collapse of faith.
Advantages of interest rate allocation in China
Let's talk about interest rates first. There are many factors that affect the exchange rate, but interest rate has always been considered to have an important influence in both industry and academia. In terms of comparable interest rates, China has been much higher than the United States in recent two years. There are both factors left over from QE in the United States and the influence of neutral and tight monetary policy implemented by China in order to deleverage.
At the bank level, China's three-month SHIBOR is 4.35%, and the three-month LIBOR in the United States is two percentage points lower than that in China, only 2.3 1%. Another concern of the market is the impact of the Fed's continued interest rate hike. According to the current dotted chart, the interest rate of the Federal Reserve will peak at 3.375% and then fall. Coupled with the normal libor-ois spread of 25bp, the three-month libor interest rate will only peak at 3.625%, which is still far below the interest rate level of SHIBOR or AAA NCD in China. At the retail end, the interest rate of American Monetary Fund is around 1.8%, while that of China Monetary Fund is around 4%. Another comparable interest rate is 10, 3.2% for US federal agency bonds and 4.45% for national debt (national debt is not directly comparable due to tax differences), and the interest rate difference is 1.25 percentage points. China debt still has obvious advantages.
The interest rate advantage of RMB is not only reflected in the nominal spread, but also in the actual spread. As of April, the CPI and core CPI in the United States were 2.5% and 2. 1% respectively, while the corresponding figures in China were only 1.8% and 2.0%. Therefore, the real interest rate advantage of RMB is 0. 1 to 0.7 percentage points higher than the nominal interest rate.
Apart from the interest rate attraction, China bonds have a low correlation with other countries' bonds. The rolling correlation of interest rate changes in 13 weeks has basically fluctuated between-0.5 and 0.5 in recent five years. The bond correlation of other countries is so high that some institutions even gave up diversification and focused on a few developed markets last year. Similarly, the correlation between China's stocks and those of other countries is very low. The principle of finance tells us that the only free lunch in finance is risk diversification. Due to the low correlation between China's bond stock and other countries, the proportion of foreign capital in China's bond stock market is low. With the expansion of China's asset scale (China's bond market has exceeded 10 trillion US dollars), and with China's assets gradually entering various indexes, the allocation of foreign capital to China's assets will increase considerably. Looking around, the proportion of foreign investment in the open bond markets such as the United States, Australia, Malaysia and Indonesia is above 25%, with a maximum of 70%. Even in Japan, a euro zone country with zero interest rate and negative interest rate, the proportion of foreign investment is close to 10% to 20% of the total market. If it is thrown away by the Japan-Europe Central Bank, the proportion of foreign investment will be higher. So in the medium term, at least $1 trillion of foreign capital flows into China in the bond market. This allocation inflow will hedge the allocation outflow of China and support the RMB.
High M2 did not lead to inflation.
The second angle is money. The popular view in the market is that China's M2 is so huge that China can buy the whole world at the spot price, so the RMB must depreciate. Although this statement seems reasonable, it is more about emotional catharsis. The same argument was applied to Japan, but the Japanese economy stopped growing for nearly 30 years. Although the yen fluctuates greatly, there is no trend depreciation.
From the perspective of China and Taiwan Province Province, it is unreasonable to pay special attention to M2. In fact, many people who are keen on speculating that the M2/GDP ratio of China is above 2 don't know that the M2/GDP ratio of Taiwan Province Province in China reached 2 around 20 10, and now it has risen to 2.4. The M2 stock of Taiwan Province Province in China is close to the GDP of Canada, the tenth largest economy in the world, and is between Russian and Australian. During the same period, the US dollar fluctuated between 29 and 33, and it only returned to 29 more than a month ago.
Whether the currency depreciates depends largely on whether the newly created currency brings enough output. A simple indicator to measure the excess money can be defined as M2 growth rate-nominal GDP growth rate. China's currency excess is usually positive 2%, but last year it was negative. At the end of the year, the growth rate of M2 was 8. 1%, which was equivalent to 1 1% of nominal GDP. According to this index, China's currency over-issuance rate was much lower than that of the United States last year, so the appreciation of RMB against the US dollar may not be completely unexpected. Since the beginning of this year, the M2 growth rate in the United States is declining, while the nominal GDP is rising, while the M2 growth rate in China is stable, but the nominal GDP growth rate is slightly declining, so the rebound of the US dollar can also be seen from this perspective.
In China, another worry brought by currency issuance is that many people think that the real price in China is very high, which is higher than that in developed countries. Specific to a specific product, this is very possible, such as luxury cars, luxury bags, luxury watches. However, these observations have obvious selection errors. These deviations can be divided into two categories. One is the tax effect, with high tariffs on luxury goods in China. The second is the purchase effect. High-income groups are the main body with the right to speak in overseas tourism and media, and such groups can easily pay a premium for high-end brands.
Two observation points show that the overall price of China is much higher than before, but still lower than that of developed countries. The first observation point is GDP. The per capita income of China calculated by the International Monetary Fund, the World Bank and even the CIA is much higher than that of China calculated by the nominal exchange rate. The second observation point is a recent report by UBS, which ranks the prices and incomes of 77 big cities around the world. In terms of price, Beijing and Shanghai, the two most expensive cities in China, only ranked between 45 and 50, and fell in the second half.
De-leverage still has confidence in the exchange rate.
Finally, faith. In recent years, the most critical issue in China is leverage. In this regard, the rapid growth of economic leverage does bring higher risks. The government is also aware of this, so it ranks risk prevention as the first of the three major battles. However, it is debatable whether China's leverage level will definitely pose a threat to the exchange rate.
Japan, with such a high debt ratio, is in trouble in the international market. Everyone's first thought is to buy yen and watch it appreciate.
Therefore, the core here is not China's absolute debt ratio, but whether China is a traditional emerging market country or an "exception" big country economy like the United States. According to the experience of emerging market countries, countries with such high debt ratios will eventually collapse. However, according to the experience of developed countries, many economies can stabilize fairly stable exchange rates under high debt levels.
Here is to clarify a common misunderstanding. Just as we look at stocks not only by PE but also by PEG, we look at a country not only by its debt level, but also by its growth level. A simple question: If China's debt ratio is at the same level as that of developed countries, but its nominal growth rate is at least twice as high as that of developed countries, then why is it not developed countries that are the first to have a crisis, but China? The exchange rate is better than anyone else and worse than anyone else. If it is worse, many developed countries will be even less optimistic. Their debt ratio is much higher than that of emerging markets, but their growth rate is much lower.
One of the core reasons why international investors failed to short the RMB in the past many years is not necessarily entirely due to the intervention of the China government, but the failure of its tried-and-true model. The traditional evolution path of emerging market crisis is a closed loop in which falling asset prices lead to capital flight, devaluation of local currency, rising inflation, raising interest rates and further falling asset prices. This closed-loop application has been interrupted in two places in China. One is capital flight (legally speaking, China's capital account has not been opened), and the other is that exchange rate depreciation does not necessarily bring inflation, which gives the central bank room to support economic recovery.
Another level is the gold content of manufacturing and service industries. The traditional evolution path of economic development is from primary industry to secondary industry and then to tertiary industry. The lower the proportion of the first two industries, the more developed the economy. However, after the financial crisis, many countries are rethinking this issue. The recent trade disputes between the United States and other countries are, to some extent, a measure that the United States hopes to return to manufacturing. If the manufacturing industry is regarded as a measure of economic resilience, the evolution of China since its entry into WTO is amazing. The added value of China's manufacturing industry increased from less than 7% in 200 1 year to nearly 30% in 20 15 year, almost equal to the sum of the United States, Japan and Germany. The whole industrial chain structure also enables China to resist the impact more effectively.
Manufacturing is the foundation of China's exchange rate stability.
The recent trade disputes can also provide another angle to analyze the value of RMB. Since the appreciation of RMB in 2005, the share of China's export products in global trade has been rising. Until today, the biggest problem facing China's exports is not uncompetitive products, but trade barriers. Many enterprises complain that the appreciation of RMB leads to the loss of profits, but at the same time, competitors are often not neighbors but neighbors. Neighboring countries are very different from their neighbors. The former needs a low exchange rate to maintain the country's competitiveness, while the latter doesn't, just needs time to adjust.
Looking to the future, the global "trust" in the United States and "distrust" in China may also change. The first level of this change may come from the deficit. In fact, this year, almost all seller economists began to talk about twin deficits in the United States. The fact that surpluses and deficits are difficult to be used for short-term trading, many analysts may wish they hadn't told the story of today's weak dollar. But this question will always exist: Where does twin deficits's currency come from? The answer is: believe it or not. The answer can also be reversed: believe it if you have it, and don't believe it if you don't have it. On the other hand, from this perspective, China is a "owned" country, and the products produced by a country with such a high proportion of manufacturing are enough to provide a "owned" basis for others to hold their local currency. It is not surprising that China, which has the largest import volume and faces many exporting countries, may not have the pricing power of crude oil, but it has certain buyer's currency options. By the way, this is the RMB crude oil futures trading in Shanghai. In just two months, the position of Shanghai crude oil futures is close to 2% of that of new york or London, and the trading volume reaches 15%~20% of the latter two. In the next few years, RMB in some crude oil trade may change the market from "disbelief" to "belief", thus affecting the supply and demand pattern of USD and RMB.
The exchange rate level has always been a multi-dimensional problem. Predicting the exchange rate is the same as predicting the prices of many financial products, and the result is usually disappointing. The author's purpose is not to predict, but to provide an analytical perspective to discuss why RMB depreciation is not as inevitable as many analysts have said and many people expected in recent years. In fact, depreciation is not even worth looking forward to, just as people should not expect their products to depreciate, but should decorate their office buildings or houses more attractive. All countries in the world have the same principle.