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The reason is not difficult to understand. First, the economic data released in the second quarter on July 16 slightly exceeded expectations, and economic downside concerns were significantly eased. Second, the central government's loosening efforts in the second quarter are not small, and the loose lag effect is fermenting. Everyone has reached a consensus on the judgment of a stable economy and moderate policies.
However, since mid-August, the market has begun to disagree. First, the financial data avalanche in July, followed by a sharp drop in power generation data in August. Some people think that the overall rate cuts have been on the line, the reason is nothing more than reducing social financing costs and alleviating economic downside risks. However, some people believe that the overall rate cuts will never occur, including our people's livelihood macro team, because the central government is more inclined to direct easing through targeted refinancing, PSL and other measures. In terms of policy predictions, the opposite sides are often logically meticulous, but no one can convince anyone. The only thing that can be tested is the first-hand information of policy makers. At this moment, Davos offers a rare opportunity.
In accordance with established practice, Premier Li Keqiang will deliver a keynote speech on behalf of the host at the opening ceremony on September 10. This was originally the most concerned part, but what I did not expect was that the people at the scene of the enterprise were as anxious as we were, and we couldn’t wait to throw the issues of concern to Premier Li, and the Prime Minister did not retain the "spoiler". It even includes some unpublished August economic data. With the release of these signals, the divergence of future policy trends should be considered as dust settled.
Signal 1: The economic growth target pays more attention to “elasticity†and the economic operation is still in a reasonable range.
Regarding economic growth, Premier Li clearly expressed two views: First, re-emphasizing the elasticity of growth targets and showing tolerance for economic fluctuations. "The economic growth target is about 7.5%. The so-called left and right is that it is ok to be higher and lower." The second is to reiterate that the economy is still in a reasonable range, refuting the economic stall concerns caused by recent data changes.
He believes that the weak performance of power generation and credit in July-August is a normal adjustment due to high base, external economic downturn and internal deep-seated contradictions, in line with government expectations. As long as there is no problem in employment (the employment has almost completed the annual task from January to August), the economy is in a reasonable range. It is particularly noteworthy that Premier Li revealed that the growth rate of M2 in August was only 12.8%, which was lower than the low point of last month. This means that the social and credit data in August is still weak, but even so, Premier Li Still stressed that "is in a reasonable range", so even if the data released later is lower than expected, the market should not expect to trigger full easing.
Signal 2: The “old normal†of full relaxation will not be reproduced, but the “new normal†of directional regulation will be replaced.
Based on the above judgments on the economy, the policy will still maintain stability and continuity. That is to say, the "old normal" of comprehensive easing will not reappear, and the expectation of comprehensive interest rate cuts will not be broken. As for the logic behind this, we have repeatedly emphasized it many times:
From an objective point of view, it is neither necessary nor feasible to comprehensively reduce interest rates. On the one hand, as Prime Minister Li Keqiang said, the current employment situation is stable and the quality of growth has improved. On the other hand, as stated in the second quarter monetary policy report, the future monetary policy will be constrained by internal and external uncertainties, which are subject to the inflationary rebound pressure driven by the pig cycle, and externally subject to the European Central Bank [microblogging] loose and declining The foreign exchange accounted for the surplus brought by the surplus. Moreover, under the premise that the current local financing platform and the financing entities such as the state-owned sector are not fully marketized, comprehensive monetary easing is tantamount to “catch the fireâ€, which not only cannot reduce the financing cost of the whole society, but also contributes to the interest rate insensitive theme. "Additional leverage" of "drug addiction."
From a subjective point of view, the central government is reluctant to violate the promise of “total stability†and “do not engage in floodingâ€, and is more inclined to reduce the financing cost of the “extruded†sector through targeted easing (directed refinancing or targeted interest rate cuts). In order to achieve the dual purpose of steady growth and structural adjustment.
Therefore, it is expected that the central government will not easily use the "big move" to cut interest rates and reduce the standard. Instead, it will achieve the effect of "directed interest rate cuts" through targeted refinancing and PSL. However, considering the difference between the current environment and the first half of the year, the intensity of directional easing may be marginal.
First, the foreign exchange accumulated by the trade surplus remains in the banking system in the form of foreign exchange deposits. The renminbi (6.1316, -0.0046, -0.07%) continues to appreciate, the stock market rebounds, and the European Central Bank cuts interest rates, which means that the risk of foreign exchange holdings is increasing. Overlaying PSL and refinancing will put credit to the pressure of the long-term investment projects of the shed and the long-term investment projects are not easy to recover. Once the foreign exchange account returns, the broad money is facing the risk of losing control.
Secondly, the current economic environment is better than the first quarter, and the steady growth policy will also play a role in the remaining temperature. Some long-term infrastructure projects supported by wide credit in the first half of the year will continue to fall. Finally, the pig cycle and the unusually dry weather in Henan and Liaoning constitute potential food inflation pressures.
Signal 3: Under the “new normalâ€, the policy focus shifts to “promoting reformâ€
If the essence of the "micro-stimulus" signal in the first half of the year is steady growth, then the essence of the "new normal" signal in the second half of the year is "promoting reform."
Monetary policy is a total policy. Even directional easing has limitations and cannot replace reform. State-owned enterprises are often regarded as risk-free assets because of their government endorsement and soft budget constraints. The non-state sector has a higher risk premium due to the decline in institutional risk appetite. Departments with government endorsements and soft budget constraints are high-yield and low-risk assets that will still be the first choice for capital allocation. After meeting the above financing needs, capital will spill over to high-yield, high-risk assets provided by SMEs.
It can be seen from the growth of M2 in August that the demand for physical financing is still sluggish and the risk appetite of financial institutions has fallen. In August, the central bank’s money supply side did not see any significant tightening, and the decline in the money supply was not an exogenous factor. The trend of real estate investment is downward, and the scale of the new economy has not yet formed on a large scale. After the policy returns to the new normal, the slowdown in infrastructure investment and fiscal expenditure has led to a decline in the effective credit demand of entities. The economic downturn has led to a decrease in the number of enterprises that meet the requirements of risk control, and the prudent investment in real estate development and the slowdown in innovation activities in the same industry have led to a decline in risk appetite for financial institutions. Together, the two create a weakening of endogenous currency creation.
The fundamental way out is to promote reforms and structural adjustments, and to direct stocks and incremental currencies to Sannong, Xiaowei and emerging industries. To change the characteristics of high-yield and low-risk assets of state-owned sectors, it is necessary to constrain the invalid investment and improve the efficiency of the use of state-owned funds; it is necessary to deepen the transformation of government functions, promote the reform of fiscal and taxation systems, and harden the financial constraints of financing entities. Changing the high-yield and high-risk characteristics of SME assets requires strengthening the core competitiveness and profitability of Sannong, Xiaowei and emerging industries through decentralization, breaking monopoly and structural tax reduction policies.
For the market, without the promotion of reform and restructuring, there will be no trend of risk-free interest rate decline and the trend of the stock market. At the entity level, high leverage and excess capacity coexist. If the downturn in total economic demand and the tightening of credit can strengthen each other, resulting in lower output prices and increased inventory pressure, the company's high output is at a loss. If the tight credit continues, the capital chain will be easily broken, eventually leading to debt default and capacity contraction. The contraction of production capacity is accompanied by the clearing of the inefficient sector, the rigid financing demand of the entity is broken, the monetary loose space is opened, and the interest rate will trend downward, but this means that the economy is difficult to make a smooth transition.
It can be seen that the risk-free interest rate breaks down requires the market to have a clearer signal of de-capacity and de-leverage. The central government needs to actively lower the forecast for economic growth and allow the debtor to default when it is insolvent. This is undoubtedly not conducive to the recovery of risk appetite and the rise of the stock market in the short term, but in the long run it is a necessary condition for the stock bull market, which is the so-called unbreakable.
A comprehensive interpretation of the three signals of Premier Li Keqiang's speech at Davos
Abstract This year's summer Davos is a bit different, not because it was opened earlier than in previous years, but because people's expectations are higher than ever. Attentive people will find that since the hosting of the expert forum on July 18, Premier Li has not talked about economic and policy trends in public for a long time...
This year's summer Davos is a bit different, not because it was opened earlier than in previous years, but because people's expectations are higher than ever. Attentive people will find that since the host of the expert forum on July 18th, Premier Li has not talked about economic and policy trends in public for a long time. In the second quarter, Premier Li’s frequently emphasized “micro-stimulus†signal has gradually disappeared and replaced. It is the "new normal" reaffirmed by General Secretary Xi on July 29. This actually hides the policy focus from "steady growth" to "promoting reform and restructuring."