Stabilize expectations before policy changes in the market curve

With the increase of cross cycle adjustment efforts in macroeconomic policies and the improvement of foresight and targeted regulation, economic momentum will gradually recover. It is expected that the full year GDP growth rate in 2022 can approach the potential growth rate during the 14th Five Year Plan period. In the short term, the interest rate level of China's bond market is relatively low, but compared with the long-term potential economic growth, the interest rate level can be said to be neither high nor low, and there is still room for decline in the future.

Financial Times reporter: In 2021, China's high-quality economic development has achieved new results and achieved a good start to the 14th Five Year Plan. However, at the same time, the Economic Work Conference pointed out that China's economic development faces triple pressures of demand contraction, supply shock, and weakening expectations. Regarding the domestic and international economic situation this year,

The 14th Five Year Plan period has ushered in a new development pattern with domestic circulation as the main body and domestic and international dual circulation promoting each other. The 2021 economic data just released by the National Bureau of Statistics shows that China's main economic indicators are within a reasonable range, overall social employment is stable, and economic resilience continues to show. However, domestic constraints and external environmental challenges also objectively exist. In the long run, under the impact of the pandemic in the 21st century, the world's century long transformation has accelerated its evolution; In the short to medium term, many central banks around the world have entered a monetary tightening cycle, further increasing the difficulty of maintaining internal and external balance in China.

In this context, the Economic Work Conference emphasized the need to adhere to high-quality development and reiterated the importance of "focusing on economic construction".

We believe that in response to the triple pressures of demand contraction, supply shock, and weakening expectations, the overall domestic policy environment in 2022 will be moderately relaxed compared to 2021. As macroeconomic policies increase cross cycle regulation efforts and improve the foresight and targeted nature of regulation, economic momentum will gradually recover. If fiscal leverage is stabilized, effective investment in carbon reduction is expanded, and industrial regulatory policies are more transparent, the GDP growth rate in 2022 can approach the potential growth rate during the 14th Five Year Plan period.

In terms of inflation, with the easing of the contradiction between supply and demand of commodities and stable growth to support the total demand, the domestic price rate is likely to show a pattern of upstream decline and downstream mild recovery. However, the risk of inflation abroad needs to be paid attention to.

Liquidity will improve compared to 2021. The real economy has benefited from the government's stable leverage, expanded fiscal expenditures, and accelerated bank credit investment. The growth rate of existing social financing is expected to stabilize and rebound in the first half of 2022.

This time, stable growth will be placed in a more important position, and effective measures will be implemented one by one to keep up. On January 17th, the central bank launched an open market operation, with reverse repurchase and MLF interest rates simultaneously reduced by 10 basis points. This played an important role in reducing social financing costs and stabilizing market expectations, reflecting the forward-looking nature of monetary policy and a clear signal of stable growth. Looking back at the "no sharp turns" in 2021, the "risk prevention" in 2018, and even earlier "supply side structural reforms", the implementation of major economic policies will go through a process. It can be said that the effectiveness of policy guidance expectations has withstood market tests.

Financial Times reporter: Faced with the current risks and challenges at home and abroad, "stability is the top priority, and seeking progress while maintaining stability" has become the main tone of economic work. Various departments have also placed stable growth and risk prevention in a more important position. What are your expectations for this year's economic policy?

Yang Aibin: In response to the situation, China's macro policies place greater emphasis on a combination of cross cycle and countercyclical regulation methods. Improving the targeting and effectiveness of policies is likely to result in measures targeting the "triple pressure".

To cope with the contraction of demand, demand side management is necessary, but it is not to follow the old path of flooding to stimulate demand, but to promote domestic demand in conjunction with the direction of China's economic transformation and upgrading. Firstly, interest rate instruments are undoubtedly an effective means of expanding aggregate demand. It can be seen that in 2021, both real estate and infrastructure investment were sluggish, while manufacturing investment instead showed resilience. This indicates that in the context of declining return on capital, gradually strengthening soft budget constraints, and high-quality economic development, the market is smart and knows which investments are effective. Therefore, policies can provide targeted support in the consumption and investment fields that meet the needs of the people for a better life, including targeted support for financial, monetary, and industrial policies to protect market entities.

Addressing supply shocks requires expanding effective supply. The supply shock problem exposed in 2021 is mainly reflected in the energy sector. The country will steadily improve its energy production and supply capacity, starting from scratch and then breaking through. On the premise of ensuring that the "energy bowl must be in its own hands", it will continue to steadfastly promote the development of green and low-carbon energy. We have seen that relevant departments have stated that they need to continue to play the role of coal as a "ballast stone", effectively play the fundamental regulatory role of coal and electricity, solidly improve the power safety and supply capacity, and continue to enhance oil and gas exploration and development efforts. Under these measures, it is expected that the risks on the supply side are basically controllable.

To cope with the weakening of expectations, not only scientific analysis but also "artistic" means need to be adopted. For the weakening of expectations caused by cyclical factors, it is necessary to clarify the attitude of supporting the bottom line in a timely manner. For example, it is necessary and timely for high-level statements on stable growth; For some expectations that have weakened due to excessive tightening, the lifting of the bell still requires ringleaders and policy revisions; It is necessary to stabilize confidence and expectations in the financial market due to the weakening of expectations caused by the resonance between finance and the real economy. It is worth mentioning that the bond market plays an important role in transmitting policy expectations. For example, in December last year, the 1-year LPR decreased while the 5-year bond remained unchanged, followed by a decrease in the short-term interest rate of the bond and an increase in the long-term interest rate. This actually reflects the decision makers' statement that 'risk response should be ahead of the market curve'.

In this economic situation and policy context, what opportunities and challenges will the domestic financial market, especially the bond market, face? What are your suggestions for investment strategy?

Economic fundamentals are the primary factor determining the long-term interest rate trend of the bond market, and on this basis, it is necessary to pay attention to other factors such as supply and demand, liquidity, and valuation. Overall, the current interest rate level in the bond market is relatively low, but it is not high or low compared to the long-term potential economic growth, and there is even some room for decline in the future.

The opportunities in the bond market in 2022 first come from the transformation of the new asset management regulations, and a large amount of resident savings will become long-term allocation funds for the bond market; Secondly, under the background of RMB internationalization and the continuous opening of China's bond market, foreign capital still continues to allocate RMB bonds; Once again, since the long-term interest rate trend is inferred to be downward based on the potential growth rate of the economy, investors can also seize the window of upward fluctuations in interest rates due to the expansion of supply issuance, expected increase in stable growth, and the impact of overseas interest rate hikes, and flexibly carry out transactions; Afterwards, investors can actively utilize financial derivatives, enrich investment strategies, and expand income opportunities.

One of the challenges in the bond market may come from investors' attention to valuation. If credit expands and total demand rebounds, there is pressure to adjust interest rates; The second challenge is credit risk, and in 2022, whether it is urban investment, real estate, finance, or industry, there is a greater need to pay attention to their actual credit qualifications. Investors are concerned about the Fed's interest rate hike, but I believe the risks in this regard are manageable. China's monetary policy has been able to freely implement regulation with the "self centered" approach. The probability of tightening in 2022 is not high, and in recent years, the "Tibetan exchange to the people" has provided a "buffer" for the international balance of payments, which can assist in internal and external balance. However, under the premise that China's long-term interest rates follow the fundamentals of the domestic economy, if there is a rapid rise in a short period of time, it will actually bring rare layout opportunities to investors.

In the past period of time, some companies have been continuously exposed to credit risks, and default cases in the bond market have been frequent. How do you view the credit default phenomenon in China's bond market?

Bond default is a phenomenon of breaking rigid redemption in the development of the bond market, which can form a competitive mechanism for the survival of the fittest in the bond market. However, in this process, it is necessary to be highly vigilant for defaulting enterprises to engage in illegal and irregular behaviors such as false information disclosure, fraudulent issuance, and even malicious "debt evasion and abandonment". Improving the legal construction of the bond market plays an important role in maintaining social fairness, justice, and market confidence. Against the backdrop of an increase in bond defaults, we have seen multiple systems being released since 2021. Combining the issue of weakening expectations mentioned in the economic work conference, using institutional construction to stabilize the expectations of market entities is actually a measure with high long-term cost-effectiveness.

In the past few years, China's bond market has developed rapidly, the pace of reform has accelerated, and the legal system has continued to improve. What are your expectations for the next steps in the reform and development of the bond market?

Looking forward to the future, China's bond market will continue to move towards a more market-oriented, legal and international direction. These three aspects intersect and are prerequisites for each other, requiring relevant departments and market entities to work together and contribute wisdom.

In terms of marketization, we expect the level of market liquidity to continue to improve, trading tools to become more diverse, trading mechanisms to become more flexible, and the level of financial technology in the bond market to continue to improve. These advances can not only facilitate investors, but also increase the support of the bond market for the real economy.

To comprehensively enhance national security capabilities, it is also necessary to pay more attention to enhancing legal thinking and enhancing the level of legalization of the bond market. As asset management practitioners, we hope to achieve positive results in improving the legal system and look forward to the introduction and implementation of more supporting measures to ensure the stable operation of the bond market under the legal framework.

In terms of internationalization, compared to the size of China's economy, there is still room for improvement in the openness of the bond market. Stabilizing foreign investment expectations and continuing to improve convenience are important measures. In addition, maintaining a flexible and moderate monetary policy, strengthening soft budget constraints in fiscal policies, and strengthening macro prudential management in financial regulatory policies are all "reassurances" for the long-term stability of the bond market