China'S Policy Easing Window Is Coming.

Despite the "patience" of the Fed meeting on 18 March, Yellen expressed his preference for doves, which would inhibit the dynamic appreciation of the US dollar in the future, and at the same time reduce the restrictions on China's loose monetary policy.

Considering the current downward pressure on the economy is still in place, we expect the two quarter will be a period of intensive easing policy, which includes monetary policy cuts, downgrades, the acceleration of financial investment and the relaxation of real estate sales.

Despite the strong performance of the stock market, the total liquidity is still abundant. The leverage of financial markets, IPO and other factors have made us cautious about whether short-term interest rates can be downhill.

The Fed will lose patience, but it will not increase interest rates soon. The US dollar exchange rate will become more volatile. In March 18th, the Fed issued a statement in the policy statement that it would give up the "patience" statement on raising interest rates, making it possible for every interest conference to become a point of interest rate increase in the future. However, the Fed lowered its forecast of economic growth and inflation at the same time, with the growth limit from 3% in December 2014 to 2.7% and the core inflation interval from 1.5% to 1.8% to 1.3% to 1.4%.

In addition, the Fed officials' forecast of the federal funds rate dropped from 1.125% at that time to 0.625%, while Yellen's position at the next press conference was also enough to send doves, which led to a sharp retreat in the US dollar index on that day and a 1.8% drop in a single day.

We believe that the current US economic and inflation portfolio is still far from the desirable goal of the fed when it enters the normalization of monetary policy.

On the one hand, from the economic point of view, the Citi economic accident index continued to decline to -72, and more industry, retail sales and real estate market data were lower than expected; on the other hand, from the inflation point of view, in January, CPI showed a negative growth of 0.1%, while the 5 year inflation rate for 5 years was only 2%, down 50 basis points from the end of 2014.

Even the Fed's most concerned labour market index rose by only 4%.

Therefore, we expect the Federal Reserve to observe the economy before June. The first rate hike in the future will still be in September or even later.

Although the Fed's policy tends to dove, the dollar exchange rate will not continue to fall. In the coming months, the US dollar index will maintain a range of shocks around 100, which means that the yen and euro will become the main financing pactions in the foreign exchange market for a long time.

From the data point of view, the current 1 year Euro swap rate is -12 basis points, while the European Central Bank will carry out QE to September 2016, which means that the easing policy will be long-term and credible, which will restrain the euro for a long time.

Rebound.

The internal and external financial market environment creates conditions for the stability of the RMB exchange rate, and provides a window period for loose policy due to the gradual easing of the dollar exchange rate, which constitutes the external conditions for the stability of the RMB exchange rate.

In addition, internal factors supporting the strengthening of the RMB exchange rate are also increasing.

On the one hand, with more countries in the UK, France, Germany and other countries joining the China's Asian infrastructure investment bank before March 31st, the strategic plan for the "one belt along the way" will also be released. In the course of the implementation of the RMB's nationalization strategy, the exchange rate should be moderately strong. On the other hand, with the recovery of the US and European economies, the "declining surplus" of our current account will remain high. The change in the private sector's expectation of the unilateral appreciation of the US dollar will increase foreign exchange, which will support the RMB exchange rate.

With the stabilization of the RMB exchange rate, it is still possible for the central bank to relax the fluctuation range of exchange rate to 3% during the year.

Considering the easing of the easing monetary policy pressure from the exchange rate, from the offshore market, the 1 year RMB Repo interest rate dropped by 50 basis points from the high of 5.55%, and offshore RMB

(CNH) since the early March, the 6.30 high point has dropped back to 6.20, which has left room for the domestic monetary policy loose. At the same time, the downward pressure on China's economy is still very large. The price of the real estate market is still declining, and sales rebounded slowly. In February, the price of the 100 cities reached a decline of 0.24%, and the 61 cities fell. The sales area of the 30 largest cities in the four cities moved back to a relatively limited level. The deflationary pressure in the industrial sector was also larger. In February, the industrial added value increased by only 6.8%, while the PPI fell by 4.8% in the same period.

The two quarter will become a period of intensive China's easing policy.

In terms of monetary policy, we expect to cut interest rates by 25 basis points at the beginning of the 2 quarter. In addition, the Central Bank of China will release fairly 2 to 3 full scale monetary base through PSL, MLF operation and direct reduction. Fiscal policy will also become more active. The government will revitalize its fiscal infrastructure, borrow from the "quasi finance" of the CDB and increase the central fiscal expenditure to maintain the growth rate of infrastructure construction around 20%. In real estate, it is expected that the reduction of the down payment ratio of two apartments and the adjustment of taxes and fees in real estate sales are all possible policy options.

Despite the easing of policy, we do not believe that the "interest rate curve upside down" can alleviate monetary policy. We believe that after March, the central bank has begun to tend to tend.

This includes reducing the 7 day reverse repo rate by 10 basis points to 3.65%, continuing to do and increasing the amount of MLF, but the 7 day repo rate center is still around 4.8%.

We do not think that the two quarter's future easing policy will guide short-term interest rates to fall effectively.

First of all, at the paction level, although the central bank's reverse repo can release loose policy signals, it is not the market interest rate decision maker because of the limited amount of money in the open market and discrete distribution. Similarly, although the central bank can create a basic currency through PSL and MLF, it is very difficult for commercial banks to form stable expectations for the scale and timing of the funding. This makes the market participants mostly increase excess liquidity and reduce the efficiency of the lending market. Secondly, the stock market has a greater impact on the money market interest rate. On the one hand, the scale expansion of the two tier market plus leveraged credit pactions, the two financial balance in the middle of March reached 1 trillion and 340 billion, an increase of 30% compared with the beginning of the year, and the ratio of financing to buying accounted for 18% of the paction.

The high turnover of the paction or the increase of short-term financing needs; on the other hand, because the myth of "unbeaten new shares" has always existed in China, the expansion of IPO is frozen at more than 1 trillion and 500 billion yuan each time, which is also a major disturbance to the short-term interest rate. Finally, the Central Bank of China is unable to effectively identify paction or financing needs in the money market. Data show that in the second half of 2014, the average growth rate of commercial banks' repurchase balance is 20%, while the growth rate of generalized funds including credit cooperatives, funds and brokerages is as high as 57%.

From this point of view, the behavior of non banking financial institutions increased the fluctuation of money market.

Therefore, if the central bank does not restrict liquidity at low interest rates, it will undoubtedly increase the risk of excessive risk-taking by investors and make the financial market more vulnerable.