Central Bank Raising Interest Rates: Urgent Need To Maintain Stability Of The RMB Exchange Rate Is Expected To Raise Interest Rates Remain To Be Seen

As the yuan continues to depreciate against the US dollar, the controversy over the gains and losses of the "double anchors" reached its peak in November, and the strong dollar seemed to exacerbate the problem.

The so-called "double anchorage", that is, in early 2016, the central bank announced a pparent central parity rule, the change of the middle price depends on two factors, one is the closing price of the day and the other two is to maintain the exchange rate of RMB / US dollar demanded by the stability of a basket of exchange rates.

Since the beginning of 2016, the RMB has depreciated more than 6% against the US dollar.

What is even more serious is that family and business departments continue to strengthen the expectation of unilateral devaluation of the renminbi, resulting in self realization of devaluation expectations.

At the same time, as China's economic data stabilizes, the debate on raising interest rates to prevent inflation and stable exchange rate is also increasing.

How do we deal with the "contradiction" between the stable exchange rate and the free floating of RMB? Is it possible for China to raise interest rates? Is the economy stable and sustainable?

Regarding this, Sheng Songcheng, the former director of the people's Bank of China's Department of investigation and statistics, accepted the exclusive interview with the first finance. His view is very clear. It is urgent to maintain the stability of the RMB exchange rate and break the unilateral depreciation trend.

"Since August 2016, China's economy has improved, but market expectations are not all rational. In the short term, they are not all returning to fundamentals. Unilateral expectations tend to overshoot the market, assuming that they would have depreciated by 5%. If families and enterprises focus on foreign exchange, the rate of depreciation may be greatly improved."

In December 12th, the central parity of the RMB fell 6.9 again, down 114 basis points.

Sheng Songcheng stressed that management expectations are important because of China's special and possibly unfavorable external debt structure.

"Net external liabilities of China's private sector.

At the end of 2015, China's short-term foreign debt was US $920 billion 600 million. Because of the expected impact on the financial management of enterprises, the expectation of unilateral depreciation of exchange rate may prompt private sector to buy foreign exchange to repay short-term foreign debt in advance, and the expectation of exchange rate depreciation has also been strengthened.

On the contrary, for example, the private sector in Japan is net external assets.

As for raising interest rates, Sheng sung Cheng mentioned in the early December that "if the time is right, if conditions are suitable, we can also consider raising interest rates."

But this time he also explicitly analyzed the specific context of this sentence for the first financial reporter.

"The economy has just stabilized and is approaching the end of the year's liquidity crisis. At present, China does not need and is unlikely to raise interest rates.

On the 15 day of December, the Fed is likely to take the lead in raising interest rates. We still need to observe the progress and impact of the rate hike next year, as well as the changes in China's inflation and economic performance, in order to determine whether the interest rate hike is mature.

From the academic point of view, on the one hand, the current foreign exchange market is in short supply. In order to allow prices to reflect changes in market supply and demand, the central bank allows the RMB to depreciate. On the other hand, the strength and weakness of the US dollar drive the fluctuation of the RMB against the US dollar.

Together, the two forces are the trend line for the gradual depreciation of the renminbi.

For this relatively market-oriented exchange rate mechanism, Sheng sung Cheng believes that there is no need to rigidly adhere to this mechanism in a specific period. "Floating RMB" is indeed appealed by scholars from all walks of life. It is also China's long-term goal, but the actual considerations are more complicated. In the face of the fundamental economic fundamentals of China, however, when the external shocks continue to devalue the renminbi and the expectation of unilateral depreciation is strong, it is imperative to "sell when it comes out", breaking the unilateral depreciation expectation of RMB and enhancing market confidence.

Sheng Songcheng analysis said: "the reason why we should attach importance to expectations is also related to China's net external debt structure and the short-term external debt concentration on the private sector.

First of all, China's foreign assets and liabilities structure mismatch is serious. Apart from the central bank, the government, banking and other sectors are all external net debt departments.

The situation of unilateral devaluation of RMB will not only cause the loss of foreign exchange reserves of the central bank, but also make other departments bear more heavy debts.

Secondly, China's short-term external debt is almost entirely concentrated in the private sector.

At the end of 2015, China's short-term foreign debt was US $920 billion 600 million.

Among them, the short-term debt of the broad government and the central bank is only 16 billion 200 million dollars, and the short-term foreign debt of the bank is US $502 billion, and the short-term external debt of the enterprise and the household sector is about 304 billion 100 million US dollars.

Because it is expected to affect the financial management of enterprises, the expectation of unilateral depreciation of exchange rate may prompt private sector to buy foreign exchange to repay short-term foreign debts in advance, and the expectation of exchange rate depreciation has also been strengthened.

"It is worth noting that Japan is different from China. Its private sector is almost entirely net assets, and the Japanese yen will only strengthen the unilateral depreciation or appreciation in one case, that is, speculation, which is also the main reason for the soaring Japanese yen at the beginning of this year.

But if the Chinese market is overshooting, besides speculation, there will be real demand for foreign exchange (exchange swap, foreign debt, etc.), which will further strengthen our expectation of depreciation.

Sheng Songcheng told reporters.

In addition, Sheng sung Cheng also mentioned that "from January next year, residents will be able to use the amount of foreign exchange purchase ($50 thousand per person) for the new year, which is expected to concentrate on foreign exchange purchases at the beginning of the year in the light of the expectation of RMB depreciation and further strengthen the depreciation of RMB value."

When it comes to intervention, it is easy for all sectors to associate with China's sharp decline in foreign exchange reserves since last year.

Due to the global asset allocation and exchange rate fluctuations of residents and enterprises, as well as the central bank's intervention in the foreign exchange market to stabilize the exchange rate, China's foreign exchange reserves continued to decrease from its peak of 3 trillion and 990 billion US dollars in June 2014. At the end of 11 this year, the scale of China's foreign exchange reserves was 30516 billion US dollars, down 69 billion 100 million US dollars from the end of 10, and the biggest decline since January this year.

There is no doubt that further intervention in foreign exchange markets may further deplete foreign exchange reserves.

"Foreign exchange reserves should be used when necessary," Sheng Songcheng told reporters. Because of China's special debt structure, letting the exchange rate depreciate will exacerbate the overshoot of the exchange rate, promote exports and boost the economy, and are not conducive to imports. Once the public's confidence in the stability of the RMB's value is hurt, the economy and society will be hard hit and foreign exchange reserves will be difficult to maintain.

On the contrary, to break or even reverse the unilateral devaluation of the renminbi, capital may also flow back. Therefore, "it can not be simply attributed to the trade-off between exchange rate and foreign exchange reserves".

Considering the above factors and taking into account the expected time of stability, Sheng Songcheng believes that it is the best time to stabilize the expected exchange rate of RMB.

At the same time, because of the depreciation of the RMB, and the recent inflation in China began to rise, so all sectors began to talk about the possibility of raising interest rates, and thought that raising interest rates seemed to be a means to maintain stability of the RMB, but also to achieve the purpose of preventing inflation and inhibiting asset bubbles.

At the beginning of December, Sheng song first mentioned the topic of China's interest rate increase at a summit, but what was misunderstood was that he could consider raising interest rates rather than raising interest rates in the near future.

Looking back at the Fed on the other side of the ocean, after the first increase in interest rates in December last year, it began to indicate to the outside world that it was still expected to raise interest rates 4 times in 2016, but so far 1 times have not been fulfilled. Therefore, the Fed is also known as "using the mouth to raise interest rates" (abbreviated as "OE" in English, that is, Oral Easing, resembling QE).

Sheng Songcheng told reporters: "personal view is that the current rate hike is not fully mature, I said" can consider raising interest rates ", that is, all kinds of factors to a certain extent can raise interest rates.

Why not raise interest rates at the moment? He said, "first of all, China's economy has just stabilized. Although the GDP 6.7% can basically be achieved this year, the recovery trend is not clear next year, and now the tightening rate will be deflation.

Economic stability and sustainable recovery are very important. I do not think we should raise interest rates immediately. "

Second, he also mentioned that in terms of the external factors, "the Fed did not raise interest rates for a year. In fact, the process of increasing the interest rate by mouth is the process of constantly releasing the effect of the final interest rate increase, which outweigh the disadvantages.

Why can't China use its mouth to raise interest rates? What is more important is that China needs no action before the Fed has yet to act and its rate hike is not clear next year.

Third, Sheng sung also stressed the difference between China and the United States in raising interest rates.

"Referring to China's interest rate increase, in fact, it is the benchmark interest rate for deposit and loan; while the United States raises interest rates, it is also the federal fund rate, which is the interest rate when banks borrow money from the Federal Reserve (the US deposit and loan interest rate has been marketed).

In fact, the Chinese money market has begun to tighten up, and the interest rate of the ten year treasury bonds continues to rise. Why do we still need to release such a strong monetary tightening signal by raising interest rates?

Of course, Sheng sung Cheng also affirmed the momentum of economic recovery in the near future, so he believes that the conditions for China's interest rate hike in the future may mature.

First of all, the economy is developing towards the right direction.

He told reporters, "the latest CPI in November was 2.3% year-on-year, and PPI was 3.3% year-on-year.

If we continue to develop, we can really consider raising interest rates. For example, the current one-year deposit rate is 1.5%, and the interest rate hike is 25 basis points, that is 1.75%.

At the end of the year, CPI will break through 2.5% and PPI will break through 5 next year.

Therefore, there is a prerequisite for raising interest rates. If the economy improves and inflationary pressures increase, it is possible to raise interest rates.

Secondly, Sheng song Cheng also believes that moderate interest rate increase will help stabilize China's exchange rate and housing prices.

At the same time, despite the fact that the economy is still fragile, the growth rate of private investment in China has picked up after 7 consecutive months of decline.

According to the data released by the National Bureau of statistics in November, private investment in China increased by 2.9% in 1-10 months, 0.4 percentage points higher than that in 1-9 months.

From the perspective of the single month growth rate, the growth rate of private investment began to turn from negative to positive in August, and the growth rate was 2.3% in the same month. In October, the growth rate of private investment rose to 5.9% year-on-year.

In addition, because real estate is the economic main line of 2016, all sectors also expressed concern about the real estate investment in 2017.

But Sheng Songcheng believes that there is no need to be too pessimistic about the growth of the real estate industry in 2017.

"In 2016, the growth rate of real estate investment was at a relatively low level, which was 4 percentage points lower than the average investment growth rate in 2013-2015 years, and the difference between the two reached the maximum of 14.5 percentage points.

Taking into account the replenishment needs of developers and the enthusiasm for investment arising therefrom, and the low growth rate of investment in 2016, local governments may also increase land supply in order to regulate and control real estate, so there is no need to worry too much about the growth rate of real estate investment next year.

In the final analysis, the standard of raising interest rates in Europe and America is simple and clear.

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For the Fed, once the inflation target is guaranteed to reach 2% and the unemployment rate below 6% has already been realized, the timing for raising interest rates is ripe.

But for China, its institutional reform is too fast and financial innovation is too fast. "We can not simply decide on historical experience. We will take into account factors at home and abroad, economic and financial factors, current and future factors, and CPI, PPI, investment, consumption, import and export, and so on, to comprehensively measure whether the interest rate window is coming."

Sheng Songcheng said.

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