Let’s try to discuss what drove the drastic changes in policy direction and intensity? Which data and events influenced the information input and priorities of the leadership? Is it possible to predict this in the future?
The core view of this article is that the fiscal difficulties of governments at all levels + feedback from foreign capital jointly drove the change in mindset, while the occurrence of significant social events increased the urgency. When the Federal Reserve cut interest rates and the RMB became unusually strong, it opened a window for action.
As of the 26th, the policy still adheres to the core characteristics of leverage, balance, and exemption from liability. But once fiscal policy is intensified, it will completely change the policy paradigm. We believe that the long leadership term framework made them hesitate to act before because they were worried about the consequences, but once they act, positive incentives will make the leaders taste the sweetness of credit currency.
(Note: The full text is one person’s opinion, and please understand the fuzzy processing of the text)
In late June, PM proposed to consolidate the foundation and cultivate the vitality, which should not have been authorized by the top to carry out large-scale stimulus. The bigger the problem, the more resources needed to deal with it, which has exceeded the authority. Otherwise, the economy is the core KPI that it bears itself, and it is difficult to explain why it does not vigorously strive for resources to achieve the goal. This is the key evidence that it had not yet turned at that time.
Subsequently, the economic data continued to fall below expectations, and the market also formed negative feedback.
The three meetings in July were still not a turning point. The measures did not exceed expectations, and the focus was too much, and there was some loss of focus. But they were aware of the problem and spent a lot of space talking about it. This is also an opportunity to communicate with representatives from all provinces. The expression of difficult voices should have increased. (Conversely, the communiqué of the bureau on the 26th was concise and clear, but every word hit the nail on the head, pointing out key issues such as real estate, employment, and consumption, and also gave the core mechanism incentive of “three distinctions”, which is crucial for the executive level that fears risks.)
Until early September, the wording was changed to strive to complete, which should have truly known the difficulties, began to realize the necessity of large-scale action, and must have the determination of the top—otherwise no one would dare to take this responsibility.
What happened in between, which data or events, and figures promoted the changes in cognition and ideas? To go a step further, did it really change?
First of all, during these three months, except for foreign trade, which was the only one that stood out, other major data all weakened. But there is a lot of data, what is the priority? What kind of data started to change the top-level concepts first, from can be put off to cannot wait?
Is it the continuous decline in housing prices, the decline in the stock market, M1, and social financing continuing to weaken? Important, but very likely not. These concepts are too complex or not core enough. From a simple perspective, the decline in housing prices reduces the burden on the people, and it is normal for the stock market to rise and fall, and the stock market has already changed its leadership in February, giving the market an explanation.
Nor is it the weakening of retail sales and industrial output. Because it is still positive growth. Can’t see it.
As for the so-called economic think tank replacement, there are lists with a semblance of form, which are basically copied from the 3 members of the economic group of the expert symposium in May, and the order has not changed. But after May, followed by June, it was still consolidating the foundation and cultivating the vitality, at least it had not yet affected it at that time. But the voice of increasing the degree of easing did pass. The views of these scholars are all publicly available.
I believe that the decline in fiscal revenue, the urgent need for salary payments in many places, and the inability to repay debts, through layer-by-layer upward feedback, is the most important data information input. The pressure of debt resolution and transfer payments is huge, coupled with the feedback on difficulties from local leaders, whether from the coast or the inland, is the most direct.
In September, there were intensive inspections in Gansu and Shaanxi. At the meeting in Gansu, the leaders of Shaanxi and Henan also came, all of which are full of development prospects, but are suffering from the impact of foreign capital withdrawal and fiscal weakness. On-site inspections in the local area are the most direct perception.
The feedback from our own team is the most direct. Just like the coincidence of the time when the epidemic was lifted and spread in Beijing: the family compound cannot accept the experience of Shanghai.
When it comes to the point of not being able to pay, it is normal for everyone to start expressing difficulties and no longer avoid talking about it. If you don’t give feedback upwards, the bottom will not be able to hold on.
And they have more feelings for the remote and old folks. In contrast, the middle class in the city may be understood as complaining without being sick.
During the three years of the epidemic, the difficulties of the old folks are no less than those in the city. Low-income people are actually more difficult, and common prosperity is not just about cutting off the sharp end.
Secondly, it is external feedback. I have specifically written that since the second half of the year, especially in these two months, various foreign capital institutions have spoken out intensively. In the past few months, the opinions of the outside world have been obviously relaxed, and it is no longer the confrontation when Yellen talked about overcapacity at the beginning of the year. Even the pessimistic views are circulating on many public accounts. And many foreign capital does hope that China’s domestic demand will rise, and the starting point is the same. If it doesn’t rise again, this largest single market in the world will be lost, and it will not be able to explain to its shareholders.
If you look closely at the itinerary, in August and September, they met with external people intensively, including China-Africa, the Trade in Services Fair, and also had a phone call with Sullivan. These are direct information inputs.
As for the further subdivision of external feedback, perhaps the 300-page report of the European Union, several in-depth reports from investment banks (involving topics such as overcapacity and balance sheet recession), and the interviews of Morgan Stanley have an impact. They will enter the internal reference and be placed on the desk, which is not important at ordinary times, but when the number increases, it will cause qualitative changes.
At this time, when it is found that both inside and outside are calling for easing and stimulus, and the fact that the economy is weak does not affect authority at all, but people will applaud the stimulus, there is no psychological burden.
But we believe that in addition to our own people and external feedback, there is also a series of dark lines that are playing an important role: social incidents. Whether it is the cumulative 3 times of incidents targeting foreigners, or the fall from the building in Hunan, it is enough to be placed on the desk.
This will cause vigilance, and the weakening of the economy to affect social stability is a bottom line. Our superiority is largely reflected here. If social security and stability are affected, it will deviate from the purely economic nature.
The unemployment rate data and these events are aligned. No chaos, absolutely no chaos.
All these signals have come together.
But we still have to wait for the window. The Federal Reserve’s interest rate cut + the RMB exchange rate is solid, and arbitrage funds want to flow back, creating this window.
But, there is always a but. Is this an all-out all-in, or a breakthrough of the norm but still adhering to the characteristics of our country’s policies?
I prefer the latter. Because this package of plans still maintains the core characteristics of our country’s policies.
Leverage, Balance, Exemption from Liability
Leverage.
Leverage is a tradition. Even in the 08 four trillion, there was still a huge leverage relationship between the central and local governments. The central government actually contributed more than 1 trillion, and the local government matched the remaining funds.
Recently, the old for new is leverage, the swap is leverage, the consumer coupons are leverage, and the reduction of down payment is even more leverage. The government guides funds, which is also leverage, to leverage social capital.
Very particular about spending small money and doing big things.
If you spend a lot of money, you need everyone to participate. It’s just that the local government can’t follow this time.
Balance.
The decision-makers must be believers in classical economics, all policies have consequences, and all the pleasure of today will bring the bitter fruit of tomorrow. Especially after the four trillion. If the interest rate cut may cause losses to the bank, then the burden on the bank must be reduced at the same time. Under the unlimited ammunition easing, a sophisticated mechanism must also be designed to make the seesaw between the bond market and the stock market. If you want to invest in the stock market, you must sell liquid bonds to exchange funds.
Exemption from Liability.
Swap convenience and repurchase loans all require market players to take action. The central bank provides support, but does not directly participate.
Just like the previous loan support for local storage. Ultimately, the market must be allowed to join the action and bear the main risks. State-owned cannot be lost.
Finally, it starts from the place with the least resistance. Starting from September, the pension issue starts from delaying retirement, and the distribution is evened out first. Monetary policy comes before policy policy, because the latter has to truly bear the debt and spend money.
The current point of divergence in the market is also here—will it go further, to the fiscal, or will it stop? Is it this time, willing to take the risk of taking care of the local government first?
This is a crucial step. The traditional concept of physical currency previously hindered the last step. Under the long-term framework, excessive issuance and excessive sovereign debt are the ideological steel stamps left by the generation of “Currency Wars”, fearing the backlash during the term of office. The quantitative easing of the United States and Japan has been scolded for so many years. Such a concept, coupled with the concerns of the exchange rate, may have led to a time lag.
But the United States and Japan have not collapsed their national debt to this day. This may be another stone under the water, groping to cross the river. For so many years, our country’s excellent fiscal discipline has made our national debt one of the most sought-after assets in the world. The recent continuous increase in overseas holdings may have also given us confidence, and the exchange rate not only did not collapse, but also reversed and forced 7.
Isn’t this a cool script? Riding a white horse to save the fire. Please also understand that this is an economy that has not experienced such a deep weakness after entering the modern monetary system. But once the thinking changes, the sweetness of unlimited firepower is the starting point.
Remember this week, the crossroads are approaching.
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