CICC: US stock exchange “kills three times”, highlights the resilience of the RMB exchange rate

The Zhitong Finance App learned that CICC released a research report saying that after the US announced additional tariffs, there was a rare situation of “three kills” in stock and bond remittance. In addition to trading factors, from a fundamental point of view, the market is pricing “US stagflation” and a “not that bad Eurozone.” The current resilience of the RMB exchange rate has added room for loose currency. In addition to traditional monetary easing instruments, interfering with risk premiums is a more noteworthy policy choice. The central bank's structural instruments have now been tested to stabilize the capital market. The breakdown of interest rates on China's 10-year treasury bonds shows that the expected short-term nominal interest rate and term premium are currently at historically low levels. The two can separately explain about half of the decline in interest rates on treasury bonds since 2021, reflecting that the market may have included a slow downward policy interest rate path and very low long-term interest rate hikes.

CICC's views are as follows:

After the US announced the imposition of additional tariffs, there was a rare situation of “three kills” in stock exchange. In addition to trading factors, from a fundamental point of view, the market is pricing “US stagflation” and a “not that bad Eurozone.” From January 1971 to now, there have been only 6 months where US stocks, US bonds, and US dollars have declined significantly at the same time. If US stocks, US bonds, and the US dollar do not change drastically in April, April 2025 will be the 7th month since 1971 that the US stock exchange rate has declined markedly in a single month. Generally speaking, the decline in US stocks, the rise in US bonds, and the rise in the US dollar are asset changes that investors are more adaptable to. However, if the US faces the risk of “stagflation,” and other economies can rely on “non-US” strength to support fundamentals, then there is a possibility that US stocks and bonds will die three times. The December 2022 US stock and bond remittance slash could help CICC understand the logic of this round of adjustments.

Corresponding to America's rare “triple kill” of equity and bond exchanges is the resilience of the RMB exchange rate. As of mid-April, although the US had imposed more than 100% tariffs on China, far higher than 18% during the 2018-2019 trade friction period, the depreciation of the RMB against the US dollar, yen, and emerging market currencies was significantly lower than in 2018-2019, and the RMB exchange rate against the US dollar was also stronger than the range predicted by CICC based on treasury bond spreads, Chinese asset risk premiums, leveraging behavior of US dollar investors, and trade policy uncertainty indices.

The resilience of the RMB exchange rate has added room to the loose currency. Lowering interest rates can effectively reduce costs. Every 10 bp reduction in stock loan interest rates is equivalent to saving 265.4 billion yuan in interest costs. The average consumer spending trend is still 0.66, and falling interest rates may also support consumption. Looking ahead, CICC believes that fundamentals are a key factor in determining interest rate cuts. Currently, China's interest rate cut expectations included in derivatives are close to the level of December last year.

Interfering with risk premiums is a more noteworthy policy choice. The central bank's structural tools have now been tested to stabilize capital markets. The breakdown of interest rates on China's 10-year treasury bonds shows that the expected short-term nominal interest rate and term premium are currently at historically low levels. The two can separately explain about half of the decline in interest rates on treasury bonds since 2021, reflecting that the market may have included a slow downward policy interest rate path and very low long-term interest rate hikes. However, interest rates that are too low will narrow banks' net interest spreads, weaken the credit stimulus effect of interest rate cuts, and may also encourage bank speculation and affect financial stability. Under such circumstances, the central bank can reduce risk premiums through table expansion, which is more conducive to stabilizing economic growth. Currently, China's central bank balance sheet has room for expansion. Central bank expansion also requires financial cooperation. Overseas experience shows that this kind of collaboration can reduce the risks borne by the private sector and guarantee the effectiveness of policy implementation.