article: Evergrande Research Institute Ren Zeping He Chen Ganyuan
The past five U.S. interest rate hike cycles have triggered two U.S. dollar appreciation cycles, but the two strong U.S. dollar cycles have triggered the Latin American debt crisis in the 1980s and the Southeast Asian financial crisis in the late 1990s respectively.
In 2018, the Federal Reserve raised interest rates, global trade frictions, and the economic cycle of the United States and emerging market countries was differentiated. The strong dollar came again, global capital returned to the United States, Turkey was the first to collapse in the exchange rate, and the general exchange rate of emerging markets depreciated and the stock market fell. Our research found that Turkey, Argentina, South Africa, Egypt, , , Pakistan, etc. face greater foreign debt risks in the short term, and there are fragility in the economic structure and financial markets: excessive foreign debt, double deficits, thin foreign reserves, excessive domestic currency issuance, asset price bubble, high inflation, and capital account opening too quickly.
This round of strong dollar cycle, will emerging markets repeat the financial crisis? Who will fall?
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After World War II, with the United States establishing its global economic hegemony, the dollar has also become the major international trade settlement and reserve currency. We systematically sorted out the classic theory and analysis framework of exchange rate decision in the "Exchange Rate Analysis Framework and RMB Outlook". From a historical perspective, the US dollar index depends on the prospects of US economic growth and monetary policy in the medium and long term, and is greatly affected by global risk aversion sentiment in the short term.
As the dollar's dominance in global trade and financial activities becomes increasingly stable, the strength of the dollar's exchange rate is also like a tide, guiding global capital flows and trade activities to expand and contract. In summary, the html's top 3 dollar cycle corresponds to the depreciation of non-US currencies, which not only causes fluctuations in the global foreign exchange market, directly affects global capital flows and major asset allocation, but also has a major impact on some international economic activities and even triggers a financial crisis.
dollar cycle mainly affects global trade economy and financial activities through two major channels: commodity market and financial market.
From the pricing level, since commodities are generally priced in US dollars, the strengthening of the US dollar has put pressure on commodity prices, coupled with the tightening of liquidity, the economy of resource-based countries has declined.
From the price level, has caused the depreciation of non-US currencies caused by the strong US dollar index, and the prices of imported goods or production factors denominated in their own country will rise, which can easily cause the continued rise in domestic prices and cause imported inflation.
From the trade perspective, Since the US dollar index is composed of currencies of developed countries, the strong US dollar generally corresponds to the depreciation of non-US currencies. According to international trade theory, under the condition of other conditions, the currency of non-US countries depreciates, the US dollar price of exports of goods or services in the country is lowered, and the currency price of imported goods or services is increased, thereby reducing the country's imports, increasing exports, and improving current account. However, the existence of the "Marshall-Lerner condition", the "J curve effect" and the orientation of resource exports still make emerging markets at risk of deterioration in foreign trade in the short term.
Today, with the deepening of global financial market resonance, the impact of the dollar cycle on the financial market and the impact of financial market fluctuations on the real economy is far more sensitive than the transmission of the commodity market.
From the perspective of liquidity, for countries that implement free floating, in the era of strong US dollar, expectations of US dollar asset returns rise, funds flow back to the United States driven by interest rate parity, and domestic capital is tight; for countries that have not yet implemented free floating, the strong US dollar cycle has increased the risk of foreign exchange reserve loss, the central bank's base currency injection passively tightened, and domestic liquidity decreased.
From the perspective of internal and external financing, the liquidity ebb of US dollar has caused countries to experience liquidity tension when the economic cycle is not synchronized, and passive interest rates have been raised, resulting in an upward trend in the actual internal and external market financing interest rates. On the one hand, the rising internal and external financing costs have damaged the profit level of real enterprises and slowed down economic growth; on the other hand, the rising external financing costs and exchange rate depreciation have caused a sharp increase in foreign liabilities denominated in local currencies, and countries with excessive foreign debt or mainly short-term liabilities are prone to debt crises.
From the perspective of asset prices, In the era of weak US dollar, market risk preferences have increased, capital flows out of the domestic US market, and a large amount of excess liquidity has poured into emerging markets or other non-US countries with high expected returns. The prices of broad assets such as stocks and real estate have risen rapidly, which is easy to trigger asset bubbles or excessive liabilities in various regions. In the context of the strong US dollar, the global capital market is tight and interest rates are rising, and funds are flowing out of non-US countries. The pressure on non-US currencies is further strengthened, and stock markets in various countries are under pressure. If there are large asset bubbles or debt risks in some parts of the world and are more sensitive to liquidity and interest rates, problems are prone to problems, such as the Latin American debt crisis in 1982 and the Southeast Asian financial crisis in 1997.
In the US interest rate hike cycle, there is uncertainty as to whether the US dollar enters the appreciation cycle. Excluding this round of interest rate hikes, only 2 of the past five US interest rate hikes have brought about the appreciation cycle of the US dollar, which was the 1980s and the mid-to-late 90s respectively. However, during the two rounds of US dollar appreciation cycles, currencies in various countries generally depreciated, triggering the Latin American debt crisis and Southeast Asian financial crisis respectively. This time, the strong US dollar hit again, and the depreciation of the general exchange rate of emerging markets and the decline in stock markets will trigger a financial crisis?
After World War II, Latin American countries once achieved rapid economic growth and showed a thriving scene by relying on resource exports, import substitution, debt development, etc. But in the early 1980s, a serious debt crisis broke out, followed by political turmoil, economic ups and downs, and fell into the "middle-income trap."
After independence, nationalism and populism in Latin American countries were strengthened, and the government generally had the desire to accelerate economic development and get rid of poverty. At that time, there were two reasons that led Latin American countries to embark on the path of foreign debt development: first, the domestic savings rate was low and funds were scarce in the early stages of economic development; second, after the first oil crisis in the Middle East War in 1973, the US and European economies fell into "stagflation", and the economic recession and low interest rate environment led to a large amount of funds flowing out from the US and Europe. In addition, the collapse of the Bretton Woods system and the improvement of financial liberalization level intensified international capital flows.International capital flowed into Latin America in large quantities. According to statistics, the total foreign debt in Latin America rose from US$21.2 billion to US$328.7 billion from 1970 to 1982, and the balance of foreign debt in Mexico and Argentina accounted for more than 50% of GDP.
After World War II, Southeast Asian countries and regions such as Japan, South Korea, Taiwan, Indonesia , Malaysia , and Thailand have achieved continuous rapid growth, which was once called the "Asian miracle". But the Southeast Asian financial crisis in 1997 interrupted this process, and the economies in these regions generally experienced a cliff-like decline and the exchange rate depreciated sharply. Since the beginning of the new century, except for Japan, only a few regions such as South Korea have successfully transformed, and most countries are still stagnant in the middle-income stage.
From the late 1980s to the early 1990s, due to the impact of the Persian Gulf War, the Third Oil Crisis, the bursting of the Japanese economic bubble, the collapse of the Soviet Union, the US economy performed sluggishly and the US dollar index weakened. At the same time, the economies of Thailand, Malaysia, Indonesia, , Singapore, and other countries achieved rapid growth of about 10% during this period, attracting a large amount of international capital to flow into South Asia, and the scale of foreign debt increased significantly. The debt maturity of these regions is seriously mismatched, and a large amount of medium- and short-term foreign debt has entered the real estate investment field. Real estate speculation is prevalent in Thailand and other countries, and asset bubbles are constantly expanding. In terms of exchange rate policy, while expanding financial liberalization and abolishing capital controls, Thailand and other countries still maintain a fixed exchange rate system, providing conditions for international speculative capital.
entered the mid-1990s, and the US economy began to recover strongly. The Federal Reserve under the leadership of Greenspan raised the federal funds rate to deal with possible inflation risks, and the US dollar entered the second strong cycle. The currencies of South Asian countries that adopt a fixed exchange rate system are forced to appreciate, and their export competitiveness is weakened. At the same time, the RMB has depreciated sharply, and China has shown strong competitiveness in attracting foreign investment and increasing exports. Exports of South Asian countries fell significantly around 1996, and current accounts deteriorated rapidly. In 1997, the Thai baht, the Philippine peso, the Indonesian rupiah, the Malaysian ringgit, the Korean won and others became the targets of attacks by international speculative capital. Large amounts of capital flowed out, the fixed exchange rate system was forced to give up, and the currency depreciated significantly. The stock market was hit hard, the real estate bubble burst, the bad debts of banks increased sharply, and financial institutions and enterprises went bankrupt on a large scale. In August 1998, the Russian Central Bank announced that it would postpone the repayment of foreign debts and suspend national bond trading yearly. The Russian debt crisis broke out, and then the financial crisis gradually escalated into an economic and political crisis. After the crisis, most Southeast Asian economies did not return to pre-crisis growth levels.
This round of strong US dollar cycle can be traced back to 2014. With the United States gradually withdrawing from quantitative easing (QE), the US dollar index rose rapidly from 2014 to 2016, and emerging markets are under pressure.With the recovery of the European economy and the rise in expectations of global monetary normalization, the US dollar index turned down in 2017, and the international offshore dollar shortage was temporarily alleviated. However, since March 2018, some factors such as the rapid rise in trade protectionism, intensified geopolitical conflicts and unexpected slowdown in Europe's economy have prompted the US dollar index to rise rapidly again. Since April, the U.S. dollar index has broken up above the 90 pressure level and then rose to around 95 consolidation.
The current fundamentals of the US economy continue to improve. Although it has reached a high level, Trump tax cuts and infrastructure may extend the prosperity. The Federal Reserve continues to raise interest rates, the European economy is less than expected, and the geopolitical situation is tense, and the strong cycle of the US dollar may continue, but the extent is limited. In the future, we need to be vigilant against the impact of spillover effects of emerging market crises on the euro and other non-US currencies, and the US dollar may further strengthen in the short term.
Türkiye's stocks and bonds and foreign exchanges were killed three times, and the market almost collapsed. Recently, the Turkish lira plummeted after Trump announced further tariffs, plunging 33% in a week since August 8. The Istanbul 100 index fell by more than 6%, and the 10-year treasury bond yield soared by 3,000 basis points to 21.53%. The Turkish government then urgently adopted measures such as reducing the reserve requirement ratio, restricting foreign investment and increasing liquidity in the foreign exchange market to maintain stability, but the effect was limited. As of August 14, the Turkish lira had depreciated 45% against the US dollar since the beginning of the year, and the stock index fell 12.9% in total.
was affected by the depreciation of the Turkish lira, and panic sentiment quickly spread to emerging economies and even euro zone . Currencies such as the Argentine peso, South African rand , Mexican peso, Russian rupee fell one after another. , the Argentine peso and the South African rand depreciated by 10.1% and 5.8% against the US dollar respectively. In fact, in May this year, the Argentine peso had experienced a sharp plunge. On May 3, the Argentine peso plummeted 8.5% against the US dollar in a single day, while the Argentine peso has depreciated by 46.7% against the US dollar since April 2018. South Africa, Mexico, Brazil, Russia and India have also staged a double-defeated stocks and foreign exchange since early April this year. Capital has accelerated outflows, currency depreciation, asset prices have fallen, and the increase in internal and external financing costs has prompted the risks of emerging market countries to be further exposed. Due to concerns about bank exposure, European bank stocks plummeted, driving the exchange rate of the euro and pound depreciation.
Logically, this round of financial fluctuations in emerging markets represented by Turkey have many similarities with the Southeast Asian financial crisis in 1998 and the Latin American debt crisis in the 1980s. Both under the strong US dollar cycle, they experienced external shocks that led to rapid outflow of funds, sharp depreciation of exchange rates, surge in foreign debt repayment costs, damage to the real economy and the domestic economy, loss of confidence in corporate residents, and further outflow of funds. So will this round of rapid decline in the Turkish lira trigger the emerging market to repeat the mistakes of the Southeast Asian crisis in the late 1990s?
Turkey's recent triple-killing situation of stocks, bonds and foreign exchanges is on the surface. On the contrary, it is caused by the US and Turkey's feud between the two countries and the US has doubled the steel and aluminum tariffs. The essence is Turkey's excessive reliance on foreign debt, over-issuance of currencies, serious asset price bubbles and backward industrial structure collapsed under the conditions of tightening liquidity in the strong US dollar cycle.
Specifically, since Erdogan came to power in 2003, Türkiye has pursued a low-interest rate and loose monetary policy, with a large number of over-issuance of currencies and a face-saving project for infrastructure construction in Daxing. Since 2003 to 2017, Turkey's economy has grown rapidly. In addition to the economic decline affected by the subprime mortgage crisis in 2009, 's GDP exceeded 6% for most years, and in some quarters it reached 11%. The corresponding Turkish broad currency M2 compound annual growth rate reached 24%. Excessive currencies eventually poured into broad financial markets such as real estate, causing rising prices and accumulation of real estate bubbles.
In addition, driven by loose liquidity, a large amount of cheap foreign capital poured into the country, Turkey's overall debt ratio rose rapidly, foreign exchange current account and the government's fiscal double deficit growth model have caused Turkey to rapidly resist external shocks, and foreign exchange exposure risks in various departments have accumulated, which are covered up under the conditions of global liquidity easing until the US dollar enters a strong cycle, coupled with Turkey's early political risks and the US-Turkey dispute, and the escalation of trade frictions, which eventually led to a sharp decline in Türkiye's exchange rate and funds fleeing.
The current economic situation in Turkey is relatively severe. In the short term, it mainly faces five major problems: escalation of U.S.-Turkey conflict, high inflation, foreign capital fleeing, exchange rate depreciation, and urgent external financing demand. The first item is external shock factors, the second item is internal economic factors, and the last three items are the results of the joint action of internal and external factors and the catalyst for further deterioration of market sentiment.
In fact, the current financing demand in Turkey has reached the level of the Asian financial crisis in the late 1990s. On the one hand, Turkey's foreign debt is mainly composed of the US dollar, and the depreciation of the lira will significantly increase the pressure on foreign debt repayment. According to the IMF's estimate report, if the lira depreciates by 30%, the actual foreign debt will account for more than 80% of GDP, and in fact, the Turkish lira has exceeded 40% against the US dollar since the beginning of the year. On the other hand, Turkey ranks among the top in the emerging markets in the short term, medium and short-term foreign debt accounts for the total foreign debt. Coupled with Turkey's current account and fiscal deficits, still cannot escape its dependence on external financing in the short term. With the significant increase in credit risks, the risk of debt defaults is relatively high.
To solve the current economic problems of Turkey, it is necessary to adjust the economic structure, optimize the financing model, and promote the supply-side industrial upgrading in the long run; and in the short term, Turkey may experience a painful adjustment period, appropriately strengthen capital controls to restrict the pro-cyclical outflow of "hot money", control the further expansion of foreign debt, tighten the currency, raise interest rates and suppress inflation, adopt active fiscal policies to regulate the economy, resolve domestic political risks and foreign US-Turkey disputes, and other policy combinations may save Turkey, but they will definitely experience pain. In addition, if the US-Turkey trade friction further escalates and the US dollar index continues to rise sharply, the possibility of an economic crisis and a financial crisis in Turkey may rise to a higher level. In recent times, Erdogan and Trump have collided hard, and the diplomatic relations between the two countries are at a deadlock. If macro policies are not adjusted in time and trade frictions are improved, Türkiye's prospects are not optimistic.
Through calculations of data such as foreign debt, foreign reserves, inflation in 15 major emerging economies, we found that some emerging market countries currently have characteristics such as excessive foreign debt, excessive dependence on foreign capital, thin foreign exchange reserves, and poor domestic economic fundamentals. Among them, Türkiye, Argentina, South Africa, Egypt and Pakistan are more likely to have debt risks in the short term. The internal economic structure is fragile and strengthening the strength of the dollar cycle impacting the financial market, and risks are rapidly transmitted to other emerging economies or even developed economies.
By conducting statistical calculations on the past currency over-issuance, inflation rate and GDP growth rate of each emerging economy, we found that emerging economies generally have over-issuance and high inflation. Among them, Argentina, Turkey and Egypt have severely issued over-issuance in the past, and the current inflation is high.
Based on the performance of various emerging economies, Turkey, Argentina, South Africa, Egypt and Pakistan may face greater risks in the short term. At present, Turkey, Argentina and South Africa have experienced sharp exchange rate plunges, rapid capital flight, economic shocks and other scenarios. Countries have adopted methods such as capital controls, interest rate hikes, and increasing foreign exchange liquidity to maintain their foreign exchange markets. However, we still need to be wary of the contagiousness of Turkey's financial crisis to emerging markets. The problems covered by emerging economies with rapid development in the past are gradually erupting in an environment of abundant global liquidity. Internal factors such as high financial vulnerability within the economy, unreasonable industrial structure, and excessive currency issuance are the main reasons for emerging countries to "explode" one by one under the strong dollar cycle.
The current foreign debt level in various countries has significantly lowered compared with before the outbreak of the Latin American crisis and Southeast Asian crisis in the 1980s and 1990s. From the perspective of debt risk indicators, the foreign debt/foreign reserves and foreign debt/national income ratios in Latin America generally reached an astonishing 900% and above 60%. Before the Southeast Asian financial crisis in the late 1990s, Thailand's foreign debt level was also far higher than its foreign exchange reserves, with the two indicators reaching 407% and 96% respectively. The overall level of foreign debt in various countries has been significantly lower than in the past. Among them, the foreign debt ratio in Argentina has dropped from an average of 54% in the 1980s to 35% today, and Thailand has dropped from 96% to 31% in 1997.The exchange rate system of
is more flexible and financial pressure is released more timely. In the 1980s, major Latin American countries such as Argentina and Brazil, as well as Southeast Asian countries such as Thailand in the late 1990s, all adopted the currency bureau system or fixed exchange rate system to link their local currencies to the US dollar. The rigid exchange rate system , on the one hand, caused the currency values of major countries in Latin America and Southeast Asia to be overvalued during periods of economic cycles. On the other hand, due to the existence of the "three-paragraph", it has lost its monetary policy independence and cannot effectively adopt monetary policy countercyclical regulation of the economy. During the economic crisis, the accumulation of exchange rate pressure has further catalyzed the escape of capital and the speculative impact of international hot money. Since the 21st century, the international exchange rate system has developed in the direction of floating exchange rates as the main one and multiple exchange rate systems coexisting. Emerging market countries that adopt a fixed exchange rate system have decreased, and have changed to adopt a floating exchange rate system or a managed floating exchange rate system. Economic and financial problems will not form a "damstone lake" and lead to a concentrated outbreak of crises.
Affected by risk aversion and supply and demand relationship, the current commodity price center remains at a certain level, and the economic pressure of resource-based emerging countries is controllable. Although commodities settled with US dollar as the main pricing are at risk of decline in the strong dollar market, commodity prices are also affected by international supply and demand and risk aversion sentiment. Since the beginning of this year, the rise of global trade protectionism, escalating trade frictions, Syrian military strikes, and the US-Iran nuclear issue have all disturbed global risk aversion sentiment and the supply and demand relationship of commodities. At present, the commodity price center, including oil and soybeans, remains at a certain level, and has provided certain support for emerging economies such as Russia, Brazil, and Mexico, and economic pressure is controllable.
The euro zone is less risky to have a similar European debt crisis due to the Turkish crisis, and overall, there is less possibility of a sharp decline in the global economy. Although Türkiye's main holders of foreign debt are EU countries such as Spain, Italy and France, it is worth noting that Turkey's foreign debt to Spain accounts for only 2% of the latter's banking loan balance, and its overall impact is limited. In addition, although the global economic recovery has declined synchronously, the US economy remains strong, the recovery momentum of the euro zone and the UK slows down, and Japan rebounds beyond expectations, the risk of collective economic stalls in the United States, Europe and Japan is low.
Although the possibility of a full-scale crisis in emerging markets is not high, the transmission of risks and the evolution of crises are often nonlinear. We need to be wary of trade frictions, geopolitical tensions, the negative impact of the short-term strengthening of the US dollar index on emerging markets, and the spillover effects caused by financial volatility in emerging markets.
strong US dollar cycle not only has an impact on the markets of international emerging markets and developed countries, but also has a series of impacts on my country's stock market and foreign exchange market. Although the current financial volatility in emerging markets has further intensified, China's foreign debt level is generally controllable overall, and the risk of a debt crisis affected by external shocks is relatively low.
Since April 2018, the RMB exchange rate against the US dollar has fluctuated and depreciated rapidly. The volatility of the RMB against the US dollar and a basket of currencies has intensified since 2018, and has gradually maintained a two-way fluctuation trend after experiencing a round of strong appreciation. Since April, the RMB exchange rate has shown a rapid fluctuation and depreciation trend. As of August 14, the onshore and offshore US dollar exchange rates against the RMB fell below 6.88, smoothing out all the gains since 2018 and returning to the May 2017 level. In our previous report, "Exchange Rate Analysis Framework and RMB Outlook", it pointed out that the depreciation of the RMB in this time is mainly affected by five aspects: the differentiation of monetary policy between China and the United States, the out-of-synchronization of the economic cycle of China and the United States, the Sino-US trade friction, the short-term rebound of the US dollar index, and the return of global capital to the United States. Recently, the rapid depreciation of emerging market currencies has further pushed up the US dollar index, prompting the RMB to depreciate against the US dollar.
But we also point out that in this round of strong US dollar cycle, although currencies from various countries depreciate against the US dollar, the RMB is still relatively strong in this regard. html At the end of June, the CFETS RMB exchange rate index was 95.66, up 0.85% from the end of the previous year; the RMB exchange rate index, which refers to the SDR currency basket, was 95.89, down 0.1% from the end of the previous year, and the rise and fall are significantly smaller than the fluctuations of the exchange rate against the US dollar.
In addition, under the continued strong US dollar, the RMB passive fluctuation and depreciation absorbed the impact of Sino-US trade frictions to a certain extent. In our previous report, "The Revelation of the Great Depression Trade War", based on international experience, proposed that under the escalation of trade frictions, countries that depreciate first will take the lead in restoring their economy and getting out of the depression. The current passive depreciation of the RMB objectively partially alleviates the pressure on China's economy by trade frictions.
From the perspective of the stock market, China's A-share market has been fluctuating and downward since 2018. As of August 14, the Shanghai Composite Index, the Shanghai and Shenzhen 300 Index and the ChiNext Index fell 17%, 17.4% and 14.2% respectively since the beginning of the year. The sluggish stock market is, on the one hand, the gradual escalation of Sino-US trade frictions, suppressing market risk appetite, and on the other hand, it is also related to the outflow of funds caused by the outflow of China and the United States' economic cycle and the differentiation of monetary policy. In fact, the decline of China's stock market is not an isolated case. Against the backdrop of the rise of trade protectionism, a new round of financial volatility in emerging markets, the increase in vulnerability of global financial markets and the structural challenges of medium- and long-term economic growth, global stock markets have experienced significant fluctuations since the beginning of this year, and most emerging market stock markets have fallen sharply.
In addition, under the strong US dollar cycle, the exchange rate impact is also transmitted to the A-share market through financial market channels. According to the reports released by some listed companies in A-shares, industries with a high proportion of foreign debt financing, led by aerospace and petrochemical, have suffered significant losses. In the stock market, it is manifested as aviation stocks that have been downgraded rapidly compared with A-shares as a whole since June this year.
Overall, my country's current foreign debt ratio, debt repayment ratio, and debt ratio are all far below the international warning line. Foreign debt is generally controllable, foreign exchange reserves are still relatively sufficient, inflation level is moderate, monetary policy maintains a reasonable level of liquidity, and the risk of an external debt crisis in the short term is relatively small. Compared with other emerging economies, although China's foreign debt scale has increased in recent years, overall, my country's current foreign debt ratio and debt ratio are 14% and 71%, both far below the international warning line. At present, my country's foreign exchange policy has returned to neutrality. Since the end of 2017, foreign exchange deposits have continued to fluctuate around 0. Foreign exchange reserves are mainly affected by changes in non-US currencies and asset prices. Foreign exchange reserves are still relatively abundant, and cross-border capital flows are still in a reasonable range. Coupled with the gradual improvement of my country's macro-prudential neutral management and micro-regulatory framework for the macro foreign exchange market, the risk of a foreign debt crisis in the short term is relatively small, and the main risks are still concentrated in the domestic high-leverage and high-debt sectors.
Adjustment of the US monetary policy is an important reason for the repeated financial crises. As an economic power, the United States has a special status as the US dollar as its main international reserve and payment currency. When the economic cycle is inconsistent with other countries, the asymmetry of monetary policy adjustments often triggers a financial crisis on the global fragile chain.
The fragile economic and financial structure is the basis for the outbreak of the crisis. The internal causes of the Latin American debt crisis are over-debt development and lack of competitiveness in industries, and the internal causes of the Southeast Asian financial crisis are slow structural adjustments and asset bubbles. As an external factor, the adjustment of US monetary policy has played a role in puncture of the bubble.
Türkiye's exchange rate collapsed and financial turmoil. There is no other reason, it is the caused by its own currency over issuance and excessive borrowing of foreign debt.This is common sense. Latin America in the 1980s and Southeast Asia exploded in the late 1990s. The strong US dollar conflict with the US-Turkey only triggered the line. Now Erdogan is trying to guide public opinion in the direction of nationalism, populism and politicization, which is a politician trick that does not face objective reality. In the early stage, he did a good job in infrastructure and privatization, but in the later stage, he was addicted to the illusion of monetary loosening, which he learned from.
The financial crisis has repeatedly interrupted the rapid catching-up process of late-developing countries' economies, and supply-side structural reform is the way out. Latin America and Southeast Asian countries once created miracles of rapid growth, but were interrupted by the financial crisis one after another. Only by making effective structural adjustments and achieving a transformation of growth momentum can we expect to avoid or get out of the crisis, such as South Korea around 1998.
During the transition period, maintaining a neutral and prudent monetary policy environment is conducive to structural adjustment. Japan in the 1970s and the United States in the 1980s both carried out effective structural adjustments. The neutral and prudent monetary policy environment provided pressure for enterprises to compress costs, technological innovation, and improve management levels, which was conducive to improving total factor productivity; while an overly loose monetary environment will trigger asset bubbles, and enterprises tend to speculate and lack the motivation and pressure to improve production efficiency, such as Latin America around the 1980s, South Asia in the late 1990s, and Turkey in recent years.
Currently facing complex internal and external situations such as Sino-US trade frictions, strong dollar cycles, domestic economic cycle downward, financial cycle turning point, supply-side structural reform, financial deleveraging, real estate regulation and establishment of long-term mechanisms, we need to attach great importance to internal and external risk transmission. We recommend that
enhance the elasticity of the RMB exchange rate, and the bottom line thinking will still be highlighted at key points. Faced with complex situations, my country's intermediate pricing mechanism will withstand more tests. On the basis of continuously optimizing and improving the pricing mechanism, we will continue to adjust in a direction that can better reflect market supply and demand. The central bank is most concerned about the depreciation of the RMB at present. The central bank is two factors: one is the outflow of funds. Judging from the current foreign exchange settlement and sale and foreign exchange reserve data, the outflow of funds is not serious yet; the other is the terrible thing not the depreciation of the exchange rate, but the expectation of a sharp depreciation and accelerated depreciation of the exchange rate. At present, the rate of exchange rate depreciation has declined. Therefore, the current fluctuations in exchange rate are still within the tolerance range of the central bank. In the future, if the bottom line is broken, if necessary, the supply and demand of foreign exchange can be adjusted countercyclically through macro-prudential policies to avoid pro-cyclical behaviors causing major ups and downs in the RMB exchange rate and reducing the spread of risks.
Strengthen communication with the market and establish stable expectations. Past historical experience shows that poor communication will aggravate market consistency expectations and trigger exchange rate overshoots. Comprehensively deepening exchange rate reform must not only play the decisive role of the market in allocating resources, but also play the role of the government. For the central bank, on the basis of increasing the market's determination of the RMB exchange rate, it is necessary to strengthen guidance and countercyclical adjustments in a timely manner to communicate and exchange views on the RMB exchange rate level and exchange rate mechanism.
Strengthen macro-prudent neutral management of the foreign exchange market and improve the micro-regulatory framework. At present, the participants in my country's foreign exchange market still have weak awareness of relevant foreign exchange risks, and use derivative financial tools to make unilateral bets on the market trends, which are prone to pro-cyclical behavior in special periods. We should strengthen the review of the authenticity, legality and compliance of foreign exchange transactions, support legal and compliant cross-border capital flows, resolutely crack down on illegal and irregular crimes such as money laundering, tax avoidance, and terrorist financing, and protect the legitimate rights and interests of market participants. At the same time, we will strengthen the investigation and punishment of "deviated from the real to the virtual" behavior of funds such as false, deceptive transactions and illegal arbitrage, and support the high-quality development of the real economy.
The internationalization of the RMB is not achieved overnight, but should be promoted in an orderly and appropriate manner based on the domestic and international situation. In the long run, with the improvement of China's economic strength and international status, promoting the internationalization of the RMB is of great significance. However, the internationalization of the RMB needs to be promoted in a timely manner in light of domestic and international economic situations and long-term pros and cons.This round of strengthening the US dollar has once again caused turmoil in the financial market, and the international community's confidence in the US dollar reserve currency has been shaken. my country can provide certain currency swap support to emerging markets at the right time and as appropriate on the basis of ensuring the stability of foreign exchange reserves and domestic economic stability, strengthen international cooperation on the "Belt and Road" and promote the internationalization of the RMB within its means.
consolidates economic fundamentals, maintains the smooth operation of the macro economy, coordinates policies through several companies, and implements active fiscal policies and prudent structural monetary policies. Domestic economic fundamentals are the basis for determining the RMB exchange rate trend and the process of RMB nationalization. Faced with downward pressure on the economy, fiscal policy and conventional monetary policies regulate the total amount; faced with financial risks, macro-prudential counter-cyclical to prevent the spread of risks across sectors; faced with debt crisis, structural monetary policy regulates targeted points to prevent the excessive expansion and rapid rupture of asset bubbles, rescue important institutions that are in crisis, and prevent the domino effect caused by bankruptcy and bankruptcy of financial institutions. At the same time, monetary and financial policies should be kept in a moderate and moderate manner, structural pre-adjustment and fine-tuning, and should not artificially amplify economic fluctuations. The best response to
is to promote a new round of reform and opening up with greater determination and courage. Promote supply-side structural reform, liberalize domestic industry controls, reduce tariff barriers in manufacturing and departmental service industries, strengthen legislation and implementation of intellectual property protection, make up for the implementation of state-owned enterprise reform, reform the housing system, establish a long-term real estate mechanism, large-scale reduction of tax burdens for enterprises and individuals, improve the business environment, and develop basic technology.
Risk warning: Financial crisis broke out in emerging markets; Sino-US trade friction escalates
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