Overnight: RMB Soars as Markets Plunge by 14 Trillion Yuan
Sullivan's visit to China has concluded, marking a new goodwill overture towards China. Nevertheless, the standoff between the People's Bank of China and the Federal Reserve in this ongoing game of monetary restraint persists. However, recent trends suggest that the Fed may be close to reaching its limit.
This contest behind closed doors is not merely a matter of stubbornness akin to a contest of endurance among men; it’s about vying for dominance in the future global financial landscape.
For our central bank, "whoever can hold out the longest will have a higher pitch when it steps onto the international stage," its voice elevated by an octave.
For the Federal Reserve, the $35 trillion in U.S. debt is hardly a concern; rather, the bursting bubble in the stock market poses a significant headache.
Have you ever seen the Federal Reserve convene an emergency meeting over the $35 trillion in U.S. debt?
When the U.S. market plummeted by 6.35% on August 5, the Fed immediately called for an emergency meeting. Can you claim that U.S. debt is more important than the stock market?
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Yet, on August 28, Nvidia released its latest quarterly financial report. Following its announcement, Nvidia’s stock fell by 8% in after-hours trading, reminiscent of the drops seen on August 5.
Was this decline due to Nvidia's performance falling short of expectations? Not quite; the market had previously projected Nvidia's revenue at $31.9 billion, while Nvidia's actual revenue reached approximately $32.5 billion, slightly exceeding expectations.
So, the question arises: why did Nvidia's stock fall even as it surpassed expectations? What does this have to do with the game of monetary endurance between the Chinese central bank and the Federal Reserve?
Why did Nvidia rise so high?
When discussing Nvidia's surge, many would assert that AI has the potential to transform life and represents the most advanced productivity of the future.
This reasoning is so far-fetched that even Jensen Huang himself might not believe it; otherwise, why would he choose to significantly cash out his shares in August?
Is it that Huang was unaware of the insider information?
Huang likely knows more about why Nvidia is rising than the so-called fathers of value investing in China.
At the beginning of 2024, even the Americans felt that the Fed needed to urinate; interest rates must be reduced. However, a new development emerged in the U.S.
They devised an internal capital circulation strategy. Normally, one would assume that high interest rates would stifle corporate investment, negatively impacting the economy.
Yet, Americans suddenly realized that a high-interest environment posed no threat to tech giants that possess vast cash reserves, requiring no financing, and could even lend externally.
In other words, these companies are not subject to the devaluation pressures of interest rates. Rather, the technological revolution spurred by AI has enhanced both the profitability and valuation of the "Fantastic Seven."
Thus, in the context of rising rates in the U.S., global capital rapidly flowed into the seven tech giants.
This situation resulted in the S&P 500: despite 493 companies falling, as long as the seven giants thrive, they can continually propel the stock market to new heights.
Furthermore, the rise in the stock index has increased the funds in personal pension accounts, enhancing the consumption capacity of certain segments of the American population, while the economy remains in a state of steady growth, disrupting the process of interest rate cuts.
However, this situation poses significant challenges for the People's Bank of China.
The Central Bank Faces Difficulties
Yi Gang once noted at the Boao Forum that a comfortable zone for the interest rate differential between China and the U.S. is about 80-100 basis points, meaning China's interest rates should be 0.8%-1% higher than those in the U.S. This would facilitate the international circulation of the RMB and encourage foreign investment in China.
This is crucial because the liquidity of U.S. Treasury bonds surpasses that of Chinese bonds; once this differential exceeds the threshold, it becomes problematic.
However, U.S. authorities are undaunted by convention, having embarked on an unrelenting campaign of rate hikes amounting to 525 basis points since March 2022, all without a bathroom break, even as pressure mounts.
Yet, this has not deterred international capital; when the affluent see a robust prospect, they are drawn in.
Capital from around the globe has begun to flood into the U.S.
This led to a rapid depreciation of the RMB from 6.3 to 7.3 in just a few months. Consequently, by 2023, the primary KPI for the People's Bank of China is to maintain the exchange rate.
Forget the stock market or real estate; the globalization of the RMB is the grand strategy.
Earlier this year, in an interview, Pan Gongsheng responded to CNBC’s inquiry regarding whether the Fed's cessation of interest rate hikes this year would allow for greater flexibility in managing the RMB by suggesting that the central bank might need to "go relieve itself."
The implication was that if the Fed were to take a break, the central bank might find an opportunity to ease rates a bit.
Pan responded, expressing his vigilance over the situation, fearing that if he stepped away for a moment, the Fed might take another drink, depleting the resources they have.
Since 2019, the Fed has unleashed a tidal wave of liquidity that has inundated the global economy, and now, while it recklessly hikes rates, I sense the Fed is nearing its breaking point.
Still, irrespective of their actions, our central bank will act according to its circumstances; decisions on interest rates will not be contingent upon them.
However, if the Fed can initiate a rate cut, then our central bank could find ample room to lower its own.
The Federal Reserve is about to crack
This isn’t something the Fed wants; it is the pressure of circumstances that forces their hand.
The deceleration in AI earnings growth can no longer satisfy the demands of Wall Street traders. Just last night, Nvidia released a predictable earnings report, yet its stock fell by 8% in after-hours trading.
The global capital capable of being siphoned off by the U.S. has already been absorbed; there are no new inflows. Data shows that global allocations to U.S. stocks have reached a record high, exceeding 60%. This serves as a warning sign—indicating that the funds available for purchasing chips now outweigh the actual chips. The U.S. stock market may struggle to maintain its stability, and the U.S. debt situation can no longer support itself. The U.S. Treasury's interest expenditures now exceed its military spending, creating a pressing need for the Fed to conclude its rate-hiking cycle and cut rates to salvage the credibility of U.S. debt; otherwise, default becomes a real possibility.
In light of such expectations, the RMB surged ahead, providing our central bank with greater latitude for monetary policy adjustments.
In the movie "Margin Call," there is a famous line: There are only three ways to make money in the financial markets: either be smarter than others, be quicker than others, or cheat. But to bottom fish, you must first be richer than the rest.
In this contest of endurance, the People's Bank of China may not necessarily be the one who endures the longest, but it will likely emerge as the ultimate victor, as holding back truly takes a toll on one’s health.
Currently, the Federal Reserve must guard against the catastrophic repercussions of any decline in the stock market's seven major players, while also contending with the unsustainable realities of high yields in U.S. debt.
If U.S. debt defaults, the dollar's standing in the international arena will plummet, potentially resulting in consequences more catastrophic than the economic crises that accompany a stock market crash.
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