As an important indicator of global liquidity and risk appetite, the U.S. dollar index recently hit a 16-month high, and it closed at 96 on November 19.
Experts believe that when major overseas central banks gradually start the process of easing policies, the turning point of global liquidity is approaching. The possibility of capital returning to advanced economies is on the rise, and emerging economies may face varying degrees of capital outflow shocks. Those emerging economies with strong epidemic control capabilities, better economic fundamentals, and moderate levels of leverage and foreign debt will maintain better economic performance.
The liquidity feast is expected to end
From the “first” interest rate hikes by a number of emerging economies, to the European and British Central Bank’s successive release of “eagles”, Then the Federal Reserve announced the implementation of Taper (cutting debt purchases). Since the beginning of this year, signals of a shift in overseas extremely loose monetary policy have gradually appeared, playing the prelude to this round of global liquidity feast.
“One possible result of the opening of the Fed’s Taper is the approach of the inflection point of global liquidity.” , The four major central banks in the UK are expanding their balance sheets to observe changes in global liquidity. The turning point of the growth rate may appear at the end of this year or early next year. Zhang Jiqiang, the chief fixed income researcher of Huatai Securities, said that the growth rate of M2 in the central banks of major developed economies has slowed down, and it may further fall below the average next year.
Recently, as the inflation whirlwind blows to more advanced economies, the financial market expects that major central banks may accelerate the pace of normalization of monetary policy.
Data show that the October CPI growth rate of the United States, the United Kingdom, Canada and other countries accelerated year-on-year. According to industry insiders, strong overseas inflation data and widespread price increases have not only contributed to inflation expectations, but also tested the “temporary inflation theory”, prompting the monetary authorities to “not retreat” or “retire” or “slow retreat” and “fast retreat”. “Choose between.
The Bank of Canada and the Bank of England have recently released “hawkish” signals, and the latter is more likely to become the first major economic central bank to raise interest rates after the epidemic becomes normal. In addition, the market’s expectations for an accelerated shift in the Fed’s policy continue to increase. More and more major international banks such as Citigroup and Morgan Stanley are betting that the Fed will raise interest rates sooner.
A global wave of interest rate hikes may come, which will have a profound impact on global liquidity. It is worth mentioning that the U.S. dollar index has risen recently.It broke 96 and hit a 16-month high. “The U.S. dollar, as an indicator of global liquidity and risk appetite, has entered a recovery channel.” CICC research report pointed out.
Emerging economies are facing test
For emerging economies, the transition from “luxury” to “thrifty” in global liquidity has a special meaning. Historically, the global liquidity contraction, especially the US dollar liquidity contraction, has repeatedly impacted emerging economies.
According to institutional sources, shrinking global liquidity will push up risk-free interest rates, triggering asset price adjustments and repricing risks. For emerging economies, shrinking dollar liquidity and rising interest rates may also encourage capital to flow back to the United States, increasing the risk of capital outflows. In addition, the liquidity contraction of the U.S. dollar often boosts the strength of the U.S. dollar, and some emerging economies will face the pressure of currency depreciation, further exacerbating debt risks.
A more recent example occurred in 2018. At that time, as the Federal Reserve raised interest rates faster, the US dollar interest rate and the exchange rate both went up, causing the currencies of some emerging economies such as the Russian ruble and the Argentine peso to show a domino-like devaluation, triggering capital outflows and stock market volatility.
Of course, the turning point of global liquidity does not necessarily mean that emerging markets will suffer. The CICC research report pointed out that its impact still needs to be analyzed in conjunction with economic performance, especially the growth difference between emerging economies and developed economies. When liquidity tends to converge and advanced economies grow faster, emerging economies are more likely to be affected.
The inflection point of global liquidity is approaching, and it is more like a “physical examination” for emerging economies. Those with strong epidemic control capabilities, better economic fundamentals, leverage and foreign debt Moderate future performance may be better. The CICC research report further pointed out that for emerging economies, in the face of shrinking global liquidity, simply responding austerity to address the symptoms but not the root cause, and a growth-focused policy is the key to reversing the pressure.
China’s economy is operating steadily and the trend is improving
If an inflection point in global liquidity emerges, what impact will it have on my country? Experts believe that my country’s economic performance is stable, the trend is good, the scale of foreign debt is moderate, the structure is optimized, the monetary policy has returned to normalization earlier, the upward momentum of macro leverage has been controlled, and the high cost performance of RMB assets has improved China’s financial response to risks and challenges. Emboldened.
In 2020, facing the severe impact of the new crown pneumonia epidemic, my country is the only major economy in the world that has achieved positive economic growth, and it is also one of the few major economies that implement normal monetary policies. At the same time, the flexibility of the RMB exchange rate has been further enhanced, and it has better played the role of an automatic stabilizer of the macro economy and international payments.
“my country’s macro fundamentals are stable, the foreign exchange market is becoming increasingly mature, the structure of external liabilities is continuously optimized, and the ability to withstand external shocks has been significantly enhanced. In this round of the Federal Reserve’s quantitative easing period, China’s foreign currency debt increased by less than half of the previous round from 2009 to 2013. The increase in domestic currency foreign debt was mainly due to foreign investors coming to invest in domestic bonds, of which there were more long-term bonds and higher stability.” said Wang Chunying, deputy director of the State Administration of Foreign Exchange .
Sun Guofeng, Director of the Central Bank’s Monetary Policy Department, said recently that the central bank has made a forward look in view of changes in the international economic and financial market environment and possible monetary policy adjustments in major economies. The policy arrangements have reduced the possible spillover impacts of the central bank policy adjustments of the Federal Reserve and other developed economies.
(The original title is “Global Liquidity Turning Point Approaching, Emerging Economies Face “Physical Examination””)