The Federal Reserve lowers interest rates by 50 basis points, officially starting the monetary easing cycle. What does this mean for China?

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Before answering this question, we must first establish a fact: after the Federal Reserve starts the monetary easing cycle, there will definitely be a huge amount of capital flowing from the United States to China; the scale of the funds will be around 1-2 trillion US dollars (estimated by Goldman Sachs).

Do not talk nonsense about the fact that after the Federal Reserve lowers interest rates, the U.S. benchmark interest rate is still above 4%, still higher than domestic interest rates, and capital will not flow back.

We need to understand that capital and finance are about expectations. Capital (especially financial capital) needs to complete all layouts before the expectations are realized (before the other shoe drops); after the other shoe drops, they can enjoy the fruits of the layout.

So, what is the expectation of the Federal Reserve lowering interest rates by 50 basis points and starting the monetary easing cycle this time? It is: the real interest rate in the United States will fall below China's level within one year; driven by the interest rate difference between China and the United States, global capital will continue to flow into China, driving the long-term rise in the prices of Chinese assets (stocks, bonds, funds, and core real estate).

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At the same time, the interest rate difference between China and the United States and the integration of global capital will also promote the long-term appreciation of the renminbi against the US dollar, with an appreciation range of 10%-15%, and even 20% is not a problem.

Under this expectation, in order to pursue higher profits and earn exchange rate differences, capital must enter China at the very beginning of the "Federal Reserve starting the monetary easing cycle" when Chinese asset prices have not yet risen and the appreciation rate of the renminbi is not so fast, and enter early to bottom fish.

The earlier global capital enters the Chinese market, the higher the exchange rate and the lower the price they can buy Chinese assets, the more they can earn.

Therefore, before and after the Federal Reserve announced the interest rate cut, smart global capital has already flowed out of the United States and into China; subsequent global capital, seeing the rise in Chinese asset prices and the appreciation of the renminbi, will also follow one after another.No one would have a grudge against money! Apart from the so-called "politically correct" funds, most global capital, including Chinese capital staying in the United States, the capital of the wealthy princes of the Middle East, European capital, and even Japanese and Korean capital, would not feel any moral pressure to abandon the United States.

Understanding this principle, we can then discuss "What does the Federal Reserve officially starting a monetary easing cycle mean for us in China?"

To make the explanation clearer, we will break it down from five dimensions: the stock market, domestic demand and investment, exports, the bond market, and the real estate market.

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Firstly, the stock market: Undoubtedly, after the Federal Reserve starts a monetary easing cycle, the domestic stock market (referred to as "Big A") will usher in a long-term rise. The current poor situation of breaking below 2700 points can basically be declared over, and a bottoming rebound is a highly probable event.

Whether you admit it or not, the domestic stock market is a speculative market (we have repeated the reasons many times before, so we won't go into detail here). Since it is a speculative market, it is easily influenced by external factors.

Especially a large number of domestic investors follow foreign capital blindly: when foreign capital flows out of Big A, they also flow out together, speculating in Singapore or North America; when foreign capital flows into Big A, they also return to the country like followers.

Therefore, when the Federal Reserve raises interest rates, foreign capital and domestic capital that worships foreign things will flow out of the domestic stock market together and flow to North America, causing a long-term decline in Big A; when the Federal Reserve lowers interest rates, foreign capital and domestic capital that worships foreign things will flow out of North America together and flow back to the country, causing a long rise in Big A.

In the last cycle (around 2019), after the Federal Reserve started the interest rate reduction tide, Big A immediately stopped falling and rebounded, ushering in a three-year rise (January 2019 - December 2021).

This time, as the Federal Reserve starts the interest rate reduction cycle, Big A is highly likely to repeat history, but there will be differences in the magnitude and duration of the rise.Stock Market

Secondly, domestic demand and investment: Undoubtedly, after the Federal Reserve initiates a monetary easing cycle, domestic consumption will also see a significant improvement.

We need to understand that over the past three years, our country's domestic demand has faced significant challenges, with residents being overwhelmed by excessive debt leverage and mortgage interest rates. In such a situation, one of the best solutions is to substantially reduce interest rates to alleviate the debt burden on residents, allowing them to have the capacity for consumption.

But why haven't we done so? This is because, under the pressure of the Federal Reserve's consecutive interest rate hikes and high interest rates, we need to maintain the "stability of the RMB exchange rate."

If we significantly reduce interest rates, causing the interest rate differential between China and the US to widen further, the RMB will violently appreciate against the US dollar, leading to chaos in imports and exports, and falling into a foreign debt repayment crisis.

In the past three years, with interest rates essentially unchanged, the RMB has still depreciated by 13% against the US dollar; if our interest rates were to decrease further, the depreciation is likely to exceed 20%-30%.

We cannot afford such consequences, so we must choose the lesser of two evils.

Investment is the same, industries across the board, especially manufacturing, find it difficult to survive under high interest rates.

However, when the Federal Reserve begins to lower interest rates, the pressure on us to maintain the stability of the RMB exchange rate will be much less; at this time, we can synchronize and start a rate-cutting cycle to stimulate consumption and boost investment.

According to foreign media reports: next month, we may significantly reduce the existing mortgage interest rates by 50 basis points at one go, ultimately reducing by 75-100 basis points, bringing the existing mortgage interest rates down to the same level as first-time home purchases (around 3.5%).This is definitely good news for boosting domestic demand.

Thirdly, exports: Like China, over the past three years, consumption in most countries around the world has been strongly suppressed due to the high interest rates set by the Federal Reserve. When the Federal Reserve begins a cycle of interest rate cuts, most countries will also synchronize with a monetary easing cycle, thereby releasing their respective consumption potential. As consumption in countries around the world strengthens, the demand for Chinese goods will also increase; our exports will naturally improve. In fact, since European, South American, and Asian countries have cut interest rates earlier than the Federal Reserve, their imports of Chinese goods have noticeably increased. Starting in April of this year, China's dollar-denominated exports have returned to year-on-year positive growth. After the Federal Reserve cuts interest rates, this growth situation will be even better.

Fourthly, bond market: After the Federal Reserve cuts interest rates, more global capital will go to buy Chinese bonds, leading to increased demand, which will push up bond prices and lower actual yields. Of course, if China takes advantage of the abundance of global capital to issue more bonds, then bond prices and yields will depend on the game of supply and demand.

Fifthly, real estate market: After the Federal Reserve cuts interest rates, the real estate market remains unchanged, like a nephew carrying a lantern.Core locations and prime properties may experience a moderate increase; however, most properties hold little value in the eyes of global capital and have poor liquidity. Being as astute as they are, they will not be there to take over the market for us.

In summary, after the Federal Reserve's first interest rate cut of 50 basis points, initiating a monetary easing cycle, our domestic consumption, investment, exports, and stock market will all improve; the coldest economic winter in the past three years can be considered over.