Chinese version of the "mystery of interest rates"

Since entering 2014, the domestic inter-bank bond market has changed the bear market situation in the second half of 2013 and has gone out of a bull market. On May 23, 2014, the China Net Debt Total Net Price Index closed at 111.09, up 3.2% from the beginning of the year.

There are many reasons for supporting the bull market in 2014. For example, the economic fundamentals are worse than expected, the inflation index is frequently lower, the central bank has adopted the policy of “regularity” through the targeted RRR release policy, and the regulatory authorities launched the No. 127 document on “non-standard” assets. Take a high-pressure attitude and so on. However, it is also possible to analyze the issue from the supply and demand of the bond market. If we assume that the supply of bonds is basically stable, the rise in the bond market must mean that there is incremental capital to buy and allocate domestic bond assets. So where does the incremental capital that pushed up the bond market in 2014 come from?

In the first quarter, overseas institutions purchased net domestic bonds amounting to 113.4 billion yuan.

A few days ago, the People’s Bank of China announced for the first time that “Overseas institutions and individuals hold domestic RMB financial assets” gave a good answer. According to the data disclosed in the table, as of the end of March 2014, the balance of domestic bonds held by overseas institutions and individuals was 512.4 billion yuan, an increase of 113.4 billion yuan from the end of the previous year. In other words, overseas institutions and individuals increased their purchase and allocation of domestic bonds by 113.4 billion yuan in the first quarter of this year.

Is the impact of this purchase size on the market large enough? In terms of increments, according to the data of the Central Clearing and Registration Corporation, in the first quarter of 2014, the amount of government bonds and financial bonds was increased by 486.2 billion yuan, of which the total increase of commercial banks was 214.9 billion yuan (including the increase of national commercial banks). 116.3 billion yuan), fund institutions increased by 53.3 billion yuan, insurance institutions increased by 36.9 billion yuan, and "other" institutions increased by 95 billion yuan. Although the data is not listed separately, the bonds bought by overseas institutions and individuals should basically be recorded in “other” projects, which is undoubtedly the largest buyer in the bond market after domestic commercial banks in the first quarter of this year.

From the perspective of stock or bond custody, the balance of bonds held by overseas institutions is only 1.6% of the total amount of bond custody, which is not high. However, considering that foreign institutions and individuals may hold mainly government bonds and financial bonds, this proportion may increase to 2.6%. Moreover, from its own expansion rate, after a short quarter, the balance of domestic bonds held by overseas institutions increased from 399 billion yuan to 512.4 billion yuan, an increase of 28.4%, and the speed is very fast.

Domestic bonds held by overseas institutions are mainly government bonds and financial bonds.

How to judge the domestic bonds held by overseas institutions and individuals is mainly national debt and financial bonds? Two evidences can be found. First, given the high threshold for bond investment, from the perspective of investment habits, domestic bonds should be mainly foreign institutions rather than individuals. According to the indicators of Shanghai Clearing House, the overseas institutions approved by the People's Bank of China to enter the domestic interbank market include: overseas central banks or monetary authorities (such as the Hong Kong Monetary Authority, Bank of Korea), Hong Kong, which have been approved by the People's Bank of China to invest in the inter-bank bond market. Macao renminbi clearing bank (such as BOC Hong Kong, BOC Macau Branch), cross-border trade renminbi settlement overseas participating banks (such as Mitsubishi Tokyo UFJ Hong Kong Branch, Nanyang Commercial Bank Co., Ltd.), overseas commercial banks (such as German Commercial Bank, Risheng International Commercial Bank), overseas non-bank financial institutions (such as Hang Seng Insurance Co., Ltd.). Such institutions prefer government bonds and financial bonds with high transparency, liquidity and low risk. What's more, the yield to maturity of domestic treasury bonds and financial bonds is around 5%, which is much higher than similar foreign bonds. These institutions are of course willing to allocate.

Second, according to the data disclosed by the Shanghai Clearing House, as of the end of March 2014, the short-term financing bills, ultra-short-term financing bills and medium-term notes held by the “People's Bank approved overseas institutions” totaled 21.14 billion yuan, compared with the end of the previous year. This is an increase of 3.39 billion yuan. This data reflects the structure of domestic bonds held by foreign institutions. Both of the above evidences show that domestic stocks held by foreign institutions are mainly government bonds and financial bonds, whether in stock or in increments.

In the future, we need to pay attention to the Chinese version of the "interest of interest rates"

On June 6, 2005, the then Chairman of the Federal Reserve, Greenspan, first raised the issue of “the mystery of interest rates” in his speech at the “Central Bank Sector Discussion” of the International Monetary Conference (interestingly, this meeting nine years ago) The venue is held in Beijing). “Since last year (2004), although the US federal funds rate has risen by 200 basis points, the long-term interest rate of US Treasury bills has dropped significantly. This phenomenon is obviously unique in the near future.” Interpretation of this issue, Greenspan proposed One of the series hypotheses is: "A large number of US bonds accumulated by foreign monetary authorities affect long-term interest rates." The facts show that none of the hypotheses, including this hypothesis, can independently explain the fact that global long-term interest rates, including the United States, have fallen. But each hypothesis also has its own unique explanatory power. An important fact revealed by Greenspan's "Implication of Interest Rates" is that under the conditions of openness, we must think about traditional issues in an open manner; in the era of globalization, we must analyze domestic economic phenomena from a global perspective.

In the first quarter of 2014, RMB paid a net external payment of RMB 560 billion through trade and service projects, and overseas institutions returned RMB 113.4 billion through the purchase of domestic bonds. In the same period, the inter-bank fixed-rate 10-year government bond yield to maturity fell from 4.5518% at the end of last year to 4.5004% at the end of March, and further dropped to 4.1574% on May 23. In analyzing the reasons for pushing down the interest rate of treasury bonds, the impact of “foreign aid” or incremental funds brought about by the internationalization of the renminbi cannot be ignored.

It can be expected that with the advancement of RMB regionalization and internationalization, the RMB assets held by overseas institutions and individuals will increase day by day, and their price movements, currency statistics and currency against China's domestic inter-bank liquidity environment, bonds and stocks. The influence of policy operations will also increase, and the possibility of the Chinese version of the "mystery of interest rates" cannot be underestimated.

From the perspective of balance of payments, the renminbi is paid overseas through cross-border trade and services of the current account, and then returned to the territory through securities investment and other investments under capital and financial projects, realizing the “curve to save the country”. The recent announcement by the central bank that "foreign institutions and individuals hold domestic renminbi financial assets" can be said to be the best footnote to this phenomenon, allowing us to more clearly outline the cross-border movement of renminbi.