The de facto debt repayment behavior of the central bank is that when companies use RMB to purchase foreign exchange, or when the government repurchases bonds, it returns the RMB originally printed by the central bank. To simply understand, it means "cancelling" the currency originally issued. This behavior is the so-called "balance sheet reduction." The central bank's reduction of balance sheet directly targets the deleveraging of the housing market and financial system. Therefore, the pace of this round of balance sheet reduction will greatly affect the real estate market. Although it is difficult for the stock market to be immune in the short term, cracking down on various institutional arbitrages will ultimately be beneficial to the long-term development of the stock market

Shrinking balance sheets means "releasing long-term high-quality assets + recovering speculative funds." Shrinking the balance sheet is a more severe tightening policy, and the Chinese-style shrinking of the balance sheet is more powerful than raising interest rates. Balance sheet reduction can be said to be another form of specific and small interest rate increase. Compared with raising interest rates to increase capital costs and curb lending activities, "shrinking the balance sheet" means directly withdrawing base money from the market, which will have a greater impact on liquidity. Therefore, shrinking the balance sheet is theoretically good for the US dollar and bad for gold.

1. Review of the Bank of China’s balance sheet reduction

The People’s Bank of China has experienced two balance sheet reductions: the first was from November 2011 to February 2012; the second was in 2015 March to December. Specifically, the first balance sheet reduction lasted for a very short time and the magnitude was not large. In four months, the central bank's total assets decreased by approximately 250 billion. The second balance sheet reduction was a very typical one. In the nine months from March to December 2015, the central bank’s total assets fell by more than 2.7 trillion.

2. China-style central bank balance sheet shrinkage ≠ American-style balance sheet shrinkage

Historically, China-style central bank balance sheet shrinkage cannot be called a monetary policy tool (this is completely different from the US-style balance sheet shrinkage). Quantitative easing policy), the expansion and contraction of the Chinese central bank's balance sheet are not based on the direction of monetary policy.

(1) The historical balance sheet shrinkage period of China’s central bank corresponds to the loosening of monetary policy

The first and second balance sheet shrinkage periods both correspond to the central bank’s reduction in statutory deposits reserve ratio. Moreover, during the second period, the central bank cut interest rates five times in a row.

(2) Historical interest rate hike cycles were not accompanied by the central bank shrinking its balance sheet

March-December 2007 and October 2010-July 2011 are the historical periods in our country’s history The last two rounds of typical monetary tightening cycles. During these two periods, we did not observe a contraction of my country's central bank's balance sheet, whether measured in absolute terms or in year-on-year growth. What’s even more surprising is that these two interest rate hike cycles correspond to the rapid expansion of the central bank’s balance sheet.