Logic Of The Wind: Three Winds In The Bull Market

A super hurricane in the stock market has been formed: the central bank acts to guard against financial risks, and creates currency and time for the reform to create time and space. Under the downward pressure of the real economy, the liquidity released by the central bank can not rely on banks to invest in entities, and the liquidity of financial entities is hot and uneven, providing a source of water for financing mortgages and sources of umbrella trusts. The willingness to lower capital expenditure of enterprises will drive down the risk-free rate of return. The downside of the economy will lead to the rigid payment being broken. The funds deposited in real estate construction and local capital construction are frantically pouring into the stock market under the combination of two brokerages and umbrella trusts.

Pigs can fly on windy days, but pigs are pigs after all. As long as there is no wind, pigs will fall.

In the days of strong wind, Shanghai Composite Index 2500, 2600, 2700, 2800 and 2900 have been easily broken through, 3000 is just around the corner, and the market turnover has broken through a record trillion mark.

Where does the current draught come from? How long the wind can blow is undoubtedly the biggest concern of investors.

When the repo rate and the injection of basic money were continuously lowered, the stubborn disease of high cost of entity financing was not solved. The central bank directly resorted to the interest rate reduction strategy and opened a new mode of strong wind blowing.

The interest rate cut continues to reduce the risk free yield and credit premium and enhance the relative attractiveness of the stock market.

In addition, lowering interest rates will reduce corporate financial costs and directly improve corporate profits.

But since the interest rate cut, the Shanghai Composite Index has risen 18%, making the central bank's monetary policy face a dilemma. If it continues to be loose, the financial market may have a bubble. But in terms of the real estate market, the stock market is high and the capital expenditure will not be restored. The downward pressure on the economy is still very large.

So the question is, will the wind from central banks stop blowing? We think the central bank's wind will not stop for a long time, because in the economic downturn and macroeconomic stability is the central bank's most important consideration.

Then there is interest rate cut.

Deposit interest rate floating and general deposit diversion to high yield assets mean that the current round of interest rate cuts has limited effect on bank debt cost reduction.

If the bank's debt cost does not drop and the risk appetite does not shrink, banks will still pass the loan interest rate to the entity, and whether the loan interest rate will really decrease remains to be seen.

If the loan interest rate does not drop, it will be very difficult to resolve the stock debt risk and form the economic increment pull.

Lowering interest rates will only be a matter of time.

First of all, foreign exchange accounts for a contraction, the basic money gap pressure is huge, and the necessity of maintaining high deposit reserve ratio is not necessary.

Secondly, if the deposit reserve ratio is not lowered, the general deposit growth will automatically increase the deposit reserve scale and consume about 1 trillion and 700 billion of the excess reserves.

Finally, if non deposit interbank deposits are included in general deposits, 2 trillion and 500 billion of the insurance interbank deposits will be removed, and the deposit reserve will be paid more than 1 trillion and 300 billion. Two to three times the reserve requirement rate should be hedged.

Directional easing will not stop.

In the context of the downward trend of investment in real estate and manufacturing industry, infrastructure investment needs to grow at a rate of 25% in order to maintain 7%-7.5% growth.

Under the hypothesis of 15 trillion of the fiscal expenditure and 5 trillion of the government's fund expenditure, the generalized finance can contribute 6-7 trillion yuan to the capital construction investment, but there is still a certain gap of funds compared with the growth rate of the 25% capital construction investment which needs 15 trillion.

Under the background that the central government is constrained by the deficit rate and the local government starts to be suppressed, it is still necessary to achieve moderate production capacity by relying on the central credit steady growth through the CDB's refinancing or PSL and other financing methods that do not need to enter the central deficit.

The central bank's monetary easing will be late but not absent.

Today, with serious overcapacity, high corporate debt ratio and difficult entity financing, opening up the registration system and the overall listing of state-owned enterprises by increasing the proportion of direct financing will help to slow down debt risk, promote SOE reform and economic pformation.

In addition, equity financing is better than non-standard debt with high interest rates. For enterprises, the former can be divided into money without dividends, while the latter has huge interest and rigid expenditure. Therefore, the central bank should be happy to see that the stock market has steadily risen, but the fear is that the market will be in a state of madness.

It is expected that after the SFC gradually increases its supervision over the two financial businesses, stabilizing the capital market of the Lenox will return the monetary easing of the central bank.

Of course, although the underlying currency that can be controlled by the central bank is the source of money supply, the formation of the final money supply needs to be derived from the credit of commercial banks.

If the banks are restricted by external supervision and internal constraints, the pmission mechanism of monetary policy will be blocked, financial entities will be hot and cold, and the wind from the financial system will be formed.

From the past normal economic situation, due to the lack of effective budgetary constraints of local governments and the long boom of real estate, the heavy industry capacity has been brutally expanded. Driven by the profit and soft budget constraint system, the real economy will always have credit starvation, and the liquidity of the banking system will also easily affect entities.

Indirect financing and substantial financing demand will directly divert funds from the financial market. The capital market dance mainly depends on the logic of the expansion of total economic demand and depends on the flying pigs.

Fig. 4 Fig. 4

Under the new normal, fiscal and tax reforms and anti-corruption rectifying local governments' investment impulses, aging population structure, the peak age of marriage age population and excess supply have suppressed the new real estate construction. The capacity of heavy industry has shifted from insufficient to excess to production capacity, and real credit hunger has been suppressed.

In the long run to capacity and the new economic growth point, banks pay more attention to the safety of their assets, liquidity is deposited in the financial system, and entity financial liquidity can be described as "two fires". They are: (1) non-standard pfer, and the scale of off balance sheet financing has shrunk; second, the credit structure is mainly based on medium and long term loans (for budgetary soft constraint Department debt extension and infrastructure investment) and notes financing; third, the interbank market liquidity is loose, and the bond market yield flat down (before the stock market starts).

When the securities companies face more and more financing needs, they can not borrow enough funds and can only look for long-term stable sources of funds.

It happened that the banks had lost interest in non-standard and interbank innovation due to strict supervision and risk appetite. They had lost a lot of basic money and financial capital, but the yield of the bond market had dropped.

Under this background, the securities dealers have raised the existing margin financing assets to the bank mortgage financing, and the liquidity and financial capital that the banks are also actively depositing into the stock market.

Fig. 9 Fig. 9

Then, where do more and more two tier market financing needs come from securities companies and trusts?

Three, the redistribution of assets from the real economy.

Over the past few years, the interest rate of shadow banking such as financial products and trust has been very high. The yield of many trust and financial products is at 7~8%, or even reached two digits. Because of the existence of rigid payment, it has become a risk-free interest rate, which has become an important factor in suppressing stock market valuation and pushing up the yield of bond market in the past few years.

But with the risk-free interest rate reduction and rigid payment breaking, the real economy opened asset redistribution.

In the past, the main driving force behind the risk-free rate of return was from the unreasonable demand of strong credit demand of the black holes in the excess capacity industry, local financing platform and developers under the soft budget constraint.

In the past, the high savings rate was the vacant Teng space of high real investment rate, but under the background of the decline of demographic dividend, the high rate of savings rate had passed.

Investment rate, rapid expansion of bank assets and the inflection point of savings rate have led banks to compete for deposits by means of high interest financial products. The proportion of interbank liabilities with unstable sources of funds in the debt side has increased rapidly, and the IMF has also taken advantage of the Internet technology. The risk-free rate of return of the whole society has risen rapidly.

As mentioned above, in 2014, as the real estate investment entered the downlink cycle, the central iron fist was fighting corruption. Article 43 stressed the debt assessment mechanism, "no official living", the local government appeared to slack off work, reduced the ineffective investment, the excess capacity zombie enterprises' capital spending intention declined, and the entity's credit thirst was completely suppressed.

At this time, the rate of drop in physical investment rate is faster than the savings rate. The pressure on the rapid expansion of bank assets scale slows down, providing high interest financial products, weakening the power of debt sources, and reducing the risk free return rate of the whole society.

In addition, because the rigid payment is broken, investors' credit premiums for financial management and trust products began to rise.

The new government stressed the adaptation to the "new normal" and increased the tolerance of economic slowdown. The government should only expand investment in infrastructure and stabilize the economy.

Because of the shrinking aggregate economic demand, financial institutions' risk appetite has declined, credit creation has contracted internally, the contradiction between supply and demand has been further intensified, industrial output and PPI decline has expanded, non-financial enterprises' solvency and tail risks have risen.

For example, the frequent breach of mineral trust is precisely because the total demand is shrinking, and the imbalance between supply and demand leads to the continuous downward trend of coal prices. The cash flow of coal enterprises is seriously contracted, and the issuers of products are reduced by the ability of rigid payment.

With the expectation of risk-free interest rate reduction and rigid payment being broken, the enthusiasm of investors in the allocation of credit financing trust is decreasing, and the bond market returns will not drop. If we take into account the undervalued value of blue chips (potential high yield assets), huge amounts of capital stuck to local government infrastructure and real estate development investment will begin to pour into the stock market.

It is not surprising that the huge volume of funds superimposed the two fuse of securities dealers and umbrella trust plus leverage, and the volume of A shares easily broke through trillion mark.

The combination of multiple tuyere resonances has created such a super hurricane: the central bank acts to guard against financial risks, and creates currency and time for the reform to create time and space. Under the downward pressure of the real economy, the liquidity released by the central bank can not rely on banks to invest in entities, and the liquidity of financial entities is hot and uneven, providing a source of water for financing mortgages and sources of umbrella trusts. The willingness to lower capital expenditures of enterprises will drive down the risk-free rate of return. The downside of the economy will lead to the rigid payment being broken. The funds deposited in real estate construction and local infrastructure investment will pour into the stock market under the umbrella of two securities and umbrella companies.