Brief Summary
This video discusses the divergence in monetary policy between the Federal Reserve and the People's Bank of China, highlighting the strategic considerations behind China's cautious approach. It emphasizes the shift towards prioritizing supply-side improvements and domestic demand stimulation in anticipation of a potential economic showdown with the United States. The video also provides insights into future policy adjustments, investment opportunities, and potential economic scenarios, including a possible financial crisis originating from US allies.
- China's monetary policy is now "self-centered" due to deteriorated US relations.
- Focus on supply-side improvements (chips, AI, military, energy, minerals) before demand stimulation.
- Expect large-scale demand-side stimulus policies next year, especially benefiting the Hong Kong stock market.
- A potential peak in the A-share market is expected in the spring of 2026, followed by a style shift.
- The central bank's monetary easing will follow principles of gradual increase, internal/external equilibrium, and the end of the financial war as a turning point.
Divergence in Monetary Policy
The Federal Reserve has been cutting interest rates, but the People's Bank of China has remained inactive, a contrast to last year when they immediately followed the Fed's rate cuts. This year, the central bank's silence indicates a strategic shift influenced by the deteriorating relationship between China and the United States. With Trump 2.0 in office, the US aims to weaken Russia and consume the Middle East before focusing on China, making cooperation unlikely.
Strategic Considerations Behind China's Policy
China's monetary policy is now "self-centered," prioritizing domestic needs over aligning with US actions. The US can leverage its dollar hegemony to print money and have the world pay for it, while China relies on domestic financing. This leads China to focus on supply-driven policies, addressing shortcomings in its industrial chain, particularly in areas like chips, AI, military industry, energy, and mineral resources.
Timing and Conditions for Releasing Liquidity
Liquidity will be released when China has addressed critical gaps in AI, chips, military industry and energy minerals. The country is currently combating "involution" (excessive internal competition) by upgrading the quality of exports and intervening in vicious competition. Signals, such as soaring profit margins in large manufacturing enterprises, suggest a major turning point is expected next year with large-scale demand-side stimulus policies.
Factors Influencing Next Year's Policy Shift
Several factors will converge next year, prompting a policy shift. The announcement of the 15th Five-Year Plan's direction by the end of October, the Federal Reserve's interest rate cuts providing safety space, Trump's "weak dollar" strategy appreciating the RMB, and the US launching a combination of easing monetary/fiscal policies will all contribute. This shift will particularly benefit the Hong Kong stock market and drive funds into the domestic market.
Central Bank's Preparations and Market Expectations
The central bank has already been making preliminary preparations for monetary easing, such as implementing a moderately loose monetary policy and utilizing securities, fund, and insurance company swap facilities. The expectation of policy rescue strengthens as the economy worsens, making the A-share market better. A potential peak in the A-share market is expected in the spring of 2026, followed by a style shift.
Debt Deflation Theory and Future Monetary Easing
The "debt deflation theory" explains the current economic situation, where high debt leads to reduced spending and investment, causing prices to fall and debt to become heavier. China aims to break this vicious cycle by gradually releasing water until the rescue is completed. The central bank's monetary easing will follow principles of gradual increase, internal/external equilibrium, and the end of the financial war as a turning point.
Key Nodes for Future Policy Adjustments
Several key nodes will trigger future policy adjustments: the implementation of the 15th Five-Year Plan, the end of the financial war and weakening of the US dollar, the emergence of positive growth in the Producer Price Index (PPI) and its transmission to the real estate market, and a financial crisis in the United States leading to strong domestic demand stimulation in China. These nodes form a roadmap for future analyses and highlight the logic behind China's long-term low interest rates.
Potential Financial Crisis and China's Strategy
China is closely monitoring the financial sector in the United States, recognizing the potential for a financial crisis. The US relies heavily on short-term debt, making it fragile. Trump's demands for increased financial contributions from allies, such as South Korea, may trigger a financial crisis in those countries first, which could then transmit back to the United States. This underscores the importance of China prioritizing its own interests and carefully managing the release of liquidity.
Global Stagflation and Investment Tips
Global stagflation is expected to escalate, impacting China through imported inflation. The People's Bank of China needs time to evaluate the risk and determine the appropriate water volume for the first wave of stimulus. This round of stimulus will see prices rise first, passively driving up nominal income, which is the opposite of the past 20 years. Wage growth will lag behind price increases, so it's important to cherish the current deflationary environment.
