The recent international financial markets have been turbulent, with the Federal Reserve in the United States not yet beginning to cut interest rates, while the Bank of Japan has started to raise interest rates. Meanwhile, some European countries have already begun to lower interest rates, turning the entire world financial market into a chaotic mess.

Global financial markets are in disarray.

For the Chinese yuan's assets, we are facing tremendous pressure. China still faces a liquidity crisis on the international stage. The high interest rates in the United States continue to siphon money out of China, and Japan's interest rate hike adds more uncertainty to the world's financial markets.

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So, facing such a complex situation, how should China respond? Today, let's discuss this topic.

Will the Federal Reserve continue to harvest the world? The capital vortex remains?

China's financial market is actually a relatively closed market. To counteract the dollar hegemony, we have built a financial firewall. Capital controls make it difficult for funds to move freely, creating a safe environment. However, this makes yuan assets somewhat insensitive to the global exchange rate market.

Nevertheless, the recent financial market fluctuations have led to a significant devaluation of the yuan exchange rate. The offshore yuan exchange rate continued to fall today, with the current rate at 1 US dollar: 7.26 yuan. This is just a step away from the 7.3 threshold, and the yuan is still hovering on the edge of the "exchange rate defense war."

So the question arises, why is the yuan exchange rate still so weak? Mainly, it is due to the unusual movements in the financial markets of the United States and Japan.

Let's first look at the United States. The situation in the United States is relatively simple. Since the Federal Reserve raised interest rates in March 2022, the US has become the country with the safest assets and the highest interest rates in the world. This has led to global liquidity flowing into the US market, turning the US into a "financial black hole" that continuously devours market liquidity.

With the release of inflation figures for January, the US inflation crisis has not been completely resolved, leading to the continuous postponement of the Federal Reserve's interest rate cut timing. The Federal Reserve's stance is more inclined to maintain the existing high interest rates.Reflected in the financial markets, the interest rates on 10-year U.S. Treasury bonds and 2-year Treasury notes remain high, and the U.S. dollar remains strong. With the dollar's strength, the Chinese yuan exchange rate will experience depreciation and selling pressure.

It is foreseeable that from now until June, the Federal Reserve will continue to maintain a high interest rate of 5.25%-5.5%, and the U.S. market will remain the "financial vortex" that absorbs global capital.

Is the Bank of Japan's interest rate hike a major shift in the global financial landscape?

Having discussed the situation in the United States, let's turn our attention to Japan. This country has always held a significant position in the global foreign exchange market due to the characteristics of yen assets being "low interest" and "stable."

As is well known, the Japanese economy has not been performing well for more than a decade. Therefore, to stimulate the economy, the Bank of Japan has long kept the yen at an interest rate of 0% or even negative, which means borrowing money from Japan is very easy, and the interest rates are also very low.

In Japan's deflationary environment, interest rates are extremely low.

It can be said that Japan has indeed provided the world's financial markets with ample liquidity. Many countries and financial groups prefer to borrow from Japanese banks when making investments, then exchange yen for dollars, and use dollars for investment. This means that Japan itself is one of the important sources of liquidity in the world's financial markets.

For example, when the American investment legend Warren Buffett wants to invest in the Japanese stock market, he does not actually invest money directly. Instead, he first borrows money from Japanese domestic banks and then uses this money to buy stocks of Japanese listed companies. Because the interest rate on yen loans is very low, this approach can earn a "spread," which is a small trick of the investment legend.

However, with the Bank of Japan announcing an interest rate hike, everything has changed. After Japan's interest rate hike, the yield on Japanese bonds has changed, which means that there has been a shift in the fundamentals of the Japanese economy. International capital begins to sell off assets from other countries and instead buys Japanese assets.

But the problem lies in the fact that Japan itself is a problematic country. As I mentioned earlier, the United States' debt of $34.6 trillion is a gray rhino, a financial nuclear bomb that is destined to explode. And Japan's debt is actually the same, even more severe than that of the United States.Due to the Bank of Japan's long-term purchase of government bonds, the Japanese government's debt has become extremely terrifying. If we say that the U.S. government's debt is only about 140% of GDP, then the debt owed by the Japanese government accounts for 250% of GDP, with the entire society's debt reaching 400% of GDP! This means that if the Bank of Japan raises interest rates, the high interest brought by the debt is something that the Japanese finance cannot bear.

Now the Bank of Japan has started to raise interest rates, and there may be another rate hike in the second half of this year. Therefore, yen assets are no longer a safe asset. This means that more funds will seek safe assets other than the yen.

What other safe assets are there globally?

If there is a problem in Japan, what are the safer assets globally? The answer is U.S. Treasury bonds and gold.

The inflow of yen safe-haven assets into U.S. Treasury bonds will make U.S. dollar assets even stronger, leading to a depreciation of the yen, more severe inflation in the United States, and a continuous strengthening of the U.S. dollar index. The actual situation is also like this.

U.S. Treasury bonds remain the safest financial assets in the world.

According to theory, if the Bank of Japan raises interest rates, it would lead to an appreciation of the yen. However, in reality, after Japan raised interest rates, the exchange rate appreciated first and then depreciated, even experiencing a sharp decline. Both the Bank of Japan and the Japanese government were forced to respond, stating that if the yen exchange rate continues to fall, the Japanese government will intervene in the market.

So you see, yen assets are no longer safe now. The remaining safe assets are U.S. Treasury bonds, which have the global capital pricing anchor or the safest assets in the world.

Of course, due to the United States' abuse of dollar hegemony, coupled with the gradual collapse of dollar credit, the number of people buying U.S. Treasury bonds is also decreasing. Even China has taken the lead in selling U.S. Treasury bonds in recent years, selling $500 billion in a few years.

So, after all calculations, it is still more cost-effective to buy gold. Therefore, according to statistics from the World Gold Council, central banks around the world have been frantically buying gold in recent years, and the international gold price has also risen as a result.So, with both Japan and the United States mired in debt crises and issues, the number of global safe assets is dwindling. The assets that can truly maintain value or be considered safe are likely only gold.

China Needs More Capital and Liquidity

What should we pay special attention to in this international chaos? First, although the central bank has repeatedly defended the exchange rate bottom line of 7.3, it has been hovering around this line for a while now. The central bank's market rescue efforts are not actually significant, especially with the recent interest rate hikes by the Bank of Japan and other related impacts, which have left the renminbi still in a depreciating predicament.

The interest rate hikes in the United States and Japan will cause global capital to flood into Japan and the United States, reducing the liquidity available to China. This is not conducive to the recovery and stability of China's economy, which requires the central bank to introduce more economic easing and monetary policy plans.

In my view, China's economic fundamentals are not problematic. After all, we possess the most comprehensive industrial system in the world, which is very appealing during the interest rate reduction cycle in the second half of the year. We will still encounter external bearish factors in the next few months, but favorable factors will come in the second half of the year.

However, can we develop faster, and can China's economy recover better? This requires solutions through fiscal policy efforts and stimulation.

I also believe that with the efforts of the central bank and fiscal policies, China's economy will have more favorable factors! People's lives will become more prosperous! Go, China's economy!