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At 2 am Beijing time on September 21, 2017, the US Federal Reserve announced that it initiated the progressive passive contraction in October this year, the first time in 16 years. The news broke out, the US dollar against the yen pulled up short-term, gold dive, the US 10-year bond yields rose, the US stocks three major indexes (S&P 500, Dow Jones Industrial Average, Nasdaq index fell across the board. Despite this US federal The decision of the reserve system (hereinafter referred to as the “Fedâ€) was long before the market expected, and the outside world still gave it a lot of attention. By contrast, the Bank of Canada’s public statement earlier in the same month did not pay enough attention. September 14 The central bank confirmed that it will be open to the revision of the inflation target, and may even downgrade or even abolish the long-held 2% target.
Fed: shrinktable can be slow to stop
The Fed’s decision to reduce its balance sheet now is an indispensable premise that there have been too many expansions.
9 years has skyrocketed more than 4 times
The Balance Sheet, also known as the statement of financial position, is the main accounting statement showing the financial status of the company on a certain date, including assets, liabilities and owner's equity. The basic equation is asset = liability + owner's equity. . For example, a limited liability company A, with its own funds of 1 million yuan, and later borrowed 2 million yuan from the bank, A's balance sheet is expressed as all assets (3 million) = owner's equity (1 million) + debt (2 million).
The Fed’s balance sheet is similar to the company, but it is more complicated, showing all assets = total liabilities + capital, the left side of the equal sign is the asset end, and the right side is the debt side. The asset side includes securities positions, repurchase, foreign exchange assets, etc., and the liability side includes federal reserve vouchers, reverse repurchase, capital, and so on. To put it simply, the money the Fed owes to others is its debt, and the money that others owe to the Fed is its assets.
Since the implementation of quantitative easing (QE) at the end of 2008, the Fed has injected a large amount of water into the market to increase liquidity. In nine years, the central bank increased its balance sheet from $800 billion to $4.5 trillion today by purchasing government bonds issued by the US Treasury and mortgage-backed securities, a four-fold increase, a nearly one-year high.
"Quantitative easing is an unconventional monetary policy. The Fed continues to inject liquidity into the market. Interest rates are suppressed very low. It also brings out various problems. For example, the real estate market is prone to bubbles, and hot money continues to flow out of the United States. It has been difficult to meet the standards, etc." Professor Qian Jun, Executive Dean of the School of International and Financial Affairs of Fudan University in Shanghai, explained this in an interview with the reporter of Economy.
Today, the main component of the Fed's asset side is about $2.4 trillion in Treasury bonds and $1.7 trillion in mortgage-backed securities (MBS). The main component of the debt side is about $1.5 trillion in currency and $2.4 trillion in reserves ( Reserve Money, commercial banks in the central bank's reserve currency) and $500 billion in overnight reverse repurchase (ON RRP).
As can be seen from these data, the Fed tends to buy government bonds. The massive purchase of government bonds will naturally generate a large demand, the price of national debt will be improved in the short term, the liquidity will increase, and the interest rate in the market will decrease. When the Fed decided to withdraw from QE, the short-term interest rate in the United States basically fell to zero.
At present, from the already open operational plan, the Fed’s attitude towards shrinking the table can be described as “taking a step by step†and is very cautious.
"The interest on treasury bonds must be cash. Before the contract is reduced, the Fed will continue to purchase the treasury bonds with interest recovered. The contracted cash interest and the principal of the maturing treasury bonds are no longer used to buy bonds, but are used to repay Debt, so that the asset side and the liability side of the balance sheet are all reduced, so it is called 'reduction of the balance sheet'." Qian Jun explained.
This contract has limited impact
Before September 21, Fed officials had said that they hoped that the process of contraction could be calmed down, and even hoped that the whole process could be as stunned as paint. However, opponents believe that the contraction will push up the benchmark bond yield, which will lead investors to panic, and the US stock market will even be implicated.
However, Tan Yaling, dean of the China Foreign Exchange Investment Research Institute, told the "Economics" reporter that the short-term rebound of the US dollar in the exchange rate market and the decline in US stocks are temporary.
“The Fed clearly stated in the resolution of the meeting on September 19-20 (local time) that the scale of the contraction will be small and the speed will be very slow. If the environment requires it, the speed can be slower or even stop. Currently, this October Expired national debt and other debts will be in the form of billions of dollars, respectively. This is also the case in November. For the people and enterprises, it is an astronomical figure, which can be compared with the total size of 4.5 trillion. The scale still takes a long time." Tan Yaling said.
Although the monetary policy meeting in late September did not disclose the specific goals and completion time of the contract, the Fed also announced the "Policy Normalization Principles and Plans" as early as June 14 this year, giving a general framework for the process of shrinking the table. The market is thus ready.
“An effective market, whose prices and trends contain all the valid information available to the market, including forecasts for decision-making bodies.†Qian Jun emphasized this. He pointed out that the way the Fed decided to shrink the table did not exceed expectations, so the market did not respond much. "If the Fed decides that it will not reduce its balance sheet because of the bad economy, the market will certainly be in a wave of waves, because this is contrary to the forecast. Or, the Fed will do this in another way, the consequences will be more serious."
Right now, the Fed only decided to take back the maturing national debt and the MBS principal, and no longer continue to invest, the so-called "passive contraction." If the Fed actively sells medium- and long-term government bonds and other debts that have not yet expired, it can also achieve the effect of shrinking the table. However, this will undoubtedly increase the supply of government bonds in the market, the price of government bonds will be lowered, and the market risk-free interest will definitely rise, driving the short-term, medium- and long-term interest rates of the US financial market to rise. As interest rates rise, corporate financing costs increase, and the cost of ordinary people buying houses and loans will also rise.
"In this way, the interest on assets denominated in US dollars will also rise. Compared with other currencies, under the same circumstances, the return of oil dollars will increase, and global capital will begin to flow back to the United States. Other currencies will face downward pressure. The dollar will appreciate, and many countries will face problems of currency depreciation and capital outflows." Qian Jun emphasized this. These are the spillover effects of the US dollar, that is, the operation of the US capital market will affect the international financial market and then extend to other countries.
No need to worry about the Chinese market
The Fed's contraction, the Chinese market mainly focuses on two issues: capital outflows, stock market trends.
Huang Zhenqi, former researcher of the Macroeconomic Research Institute of the National Development and Reform Commission, said in an interview with the "Economics" reporter that once the contraction begins, the expectation of the appreciation of the US dollar will indeed increase, but the Chinese market will not feel the impact.
The US Treasury bond ceiling is 20 trillion US dollars. On September 11, the US official data showed that its national debt has increased to 20.162 trillion US dollars. Exceeding the regulations, the US dollar has appreciated, and the interest on national debt is bound to increase, which is unfavorable to the development of the US economy. "This can be reversed to prove that the contract will be very cautious."
The Chinese economy has entered its best state in the past two years, with an average GDP growth rate of 6.9% in the first two quarters of 2017. Although the US dollar appreciated 6.5% against the RMB in 2016, the RMB has appreciated 6% against the US dollar since 2017. Huang Zhenqi pointed out that China, as the world's largest market, has the strength and conditions to attract foreign investment, and overseas capital will not give up easily.
In addition, the People's Bank of China has taken measures to control capital outflows for the financial turmoil in 2015 and 2016, such as restrictions on capital outflows and control over overseas acquisitions of Chinese companies. This series of measures will play a role.
As for the Chinese stock market, Tan Yaling said: "After the announcement of the contract reduction, the reaction of the US stock market was very limited, but it fell more than 80 points, but it has risen for 9 days. The Chinese stock market has never been affected by others, how others love it. Others Up, we fall, others fall, we rise."
Western central bank bears the consequences of water release
The concentrated attention of the international financial market to the Fed has, to a certain extent, concealed the importance of the Bank of Canada’s change in attitude towards inflation. The Bank of Canada first set a 2% inflation target in 1991 and has been in operation for 25 years. By the end of 2016, the agency also reiterated the importance of maintaining inflation targets. However, in mid-September this year, the Bank of Canada stated that the future may no longer be adhered to.
Asset prices are shrinking
"Whether it is the Fed's contraction or the Bank of Canada's abandonment of the inflation target, it tells us the fact that the central banks in Western countries can't hold back." Jia Jinjing, chief researcher of Chongyang Financial Research Institute of Renmin University of China, was interviewed by the reporter of "Economics". Say.
What determines the monetary policy of a central bank of a country? In the past, there was a complete theory that the central bank's policy decision was to serve the national economy. Therefore, the central bank often pays special attention to inflation, employment indicators, import and export, and exchange rates, and uses this as a basis for decision-making.
However, in the 10 years after the international financial crisis, central banks in the western countries generally implemented large-scale monetary stimulus policies, releasing a large amount of liquidity to the market, high stocks of money, and high leverage in the market. This has led to a very serious problem: now, no matter what kind of monetary policy these central banks implement, it is basically difficult to have an important or substantial impact on market trends. Jia Jinjing pointed out: "The market stocks are so large that these central banks simply cannot get back, resulting in a policy failure."
He stressed that whether it is the central bank of Japan or Europe and the United States, the focus on itself is far more than the concern for the domestic economy, and all "serving for the economy" is just to talk about it. For these institutions, there are only two core issues now and in the future: one is shrinking and the other is asset prices.
The asset price refers to the ratio of assets converted to money, that is, how much money a unit of assets can be converted into. The shrinking boots have fallen, the dollar in the market will decrease, and the dollar-denominated asset price will theoretically shrink.
On September 18th, Deutsche Bank Deutsche Bank established a model after analyzing 15 developed market bonds and stock markets, indicating that global asset prices have been seriously overestimated and reached the highest level in history. Although asset prices are generally overvalued, the central bank of the Western countries has been released for 10 consecutive years, and the Fed’s contraction will be extremely cautious. The asset prices of developed countries will not necessarily shrink significantly, and there is a high possibility of stability.
ECB continues to easing policy
On September 6, 2017, the Bank of Canada announced a rate hike and said in a statement that the appreciation of the Canadian dollar reflects the strength of the economy. The Fed has also raised interest rates several times since the end of 2015 and is expected to have another one in 2017. Since global asset prices are overvalued and the stock of money in the market is also extremely high, the rate hike should be a model for the central banks in the West.
However, on September 22, the European Central Bank (ECB) president Mario Draghi said in Dublin that the ECB's monetary policy goal is to ensure price stability, and the price stability is connotation Close to the 2% level. This statement also means that the ECB will remain accommodative in the current and short-term future.
Professor Ding Chun, director of the Center for European Studies at Fudan University, told the Economics reporter that the European Central Bank was also forced to do so. Even though the European economy has recovered, the momentum is not optimistic. “Europeans are very cautious overall, and the external economic environment is not very reassuring. The actions of President Trump are full of populist styles, and the ECB will not easily change the current policy.â€
However, the ECB’s insistence on loose monetary policy should not last long. He believes that the central bank may take measures to withdraw from QE by the end of 2017. In addition to monetary policy, the European Central Bank has to face another rather difficult issue: the president's change.
The ECB President may not be re-elected. The current President Draghi is Italian and his term of office ends on October 31, 2019. At present, there are already differences among EU member states for succession candidates.
France and Italy have long hinted to Germany that they are open to the Germans as ECB presidents, but the candidates cannot be the current Bundesbank governor Jens Weidmann. From the current news, German Chancellor Angela Merkel and German Finance Minister Wolfgang Schaeuble want Weidmann to succeed Draghi.
"Weidemann has long been critical of the ECB's quantitative easing policy. He believes that the ECB should maintain a tightening policy and build a strong currency. This is what France and Italy are worried about, because even now Europe is not without crisis. In the future, ECB presidents will oppose flexible monetary policy, and some countries will be more upset.†Ding Chun explained.
On the European continent, the Germans' monetary policy is not very popular, but Weidmann has been low-key for a long time and seems to be preparing for succession. To date, the head of the ECB has never been a German.
Bank of Japan sticks to 2% inflation target
In line with the ECB vents, the Bank of Japan. On September 21, the central bank held a monetary policy meeting and decided to maintain the current monetary easing policy. The Bank of Japan believes that as the 2% inflation target aimed at getting rid of deflation is still far away, it is necessary to perseverely adhere to the easing policy, control short-term interest rates at -0.1%, and long-term interest rates at around 0% to support the economy.
In this regard, Zhang Jifeng, director and researcher of the Economic Research Institute of the Japanese Academy of Social Sciences, told the Economics reporter that even for the Bank of Japan, it is only a matter of time before the quantitative easing is withdrawn.
"Quantitative easing has reached an unrecognizable level. It is difficult to have a good result after it continues. The Bank of Japan does not dare to do this now because it wants to maintain short-term economic growth and maintain a good state of the stock market. In addition, the yen needs to maintain a long-term depreciation state, otherwise it will hit the export too much. The interest rate hike will make the yen appreciate and expect to rise. This is what the Japanese government does not want to see. If the above three points cannot be saved, Abe’s political life There will be a lot of risk."
Analysts believe that when the monetary policies of the US and Canadian central banks return to normal, the Bank of Japan and the European Central Bank have been slow to move, suggesting that the differences in global central bank policy directions will become increasingly prominent.
Zhang Monan, an associate researcher at the World Economic Research Office of the Economic Forecasting Department of the National Information Center, told the Economics reporter that monetary policy needs independence, counter-cyclical, and macro-prudential. The Bank of Canada does not consider inflation because the inflation target is not the most urgent need for Canada to resolve, and the Bank of Japan chose to continue to adhere to quantitative easing because it is most concerned about economic recovery.
“The ultimate goal of the central bank is generally price stability, full employment, balance of payments, economic growth, and some intermediate targets, such as the money supply, interest rates, and the stability of total credit. When macroeconomic policies are implemented, basic It is impossible to take into account all the ultimate goals, and always choose the most urgent and most important aspects of the time." Zhang Monan said.
However, Jia Jinjing believes that the differentiation of central bank policies in the West is only a "flight" in the face of difficulties. In contrast, the performance of the People's Bank of China is very calm. "It can be said that in today's international financial sector, the People's Bank of China has fully played its role in stabilizing the market. We do not have the problem of excessive market capital stock. The measures of the People's Bank of China are both effective and timely."
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