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Recently, global supply-chain woes are beginning to recede and the undersupply situation of container freight has indeed improved. However, the shortage issue isn’t going to completely disappear, real dawn may have to wait until early next year. Considering that the pandemic in Europe is rampant again, as well as Vietnam epidemic control is still unstable, there may be variables in the turnaround of the crisis.
Recently, the US inflation has exceeded the standard, consumption data has been firm, and market expectation of the Fed raising the interest rate has risen. In the context of the US inflation“broke 6”, the possibility of the Fed to speed up Taper cannot be ruled out. It is most likely to increase the monthly amount of bond tapering from the current $15 billion to $30 billion, thereby bringing the end of Taper forward from June to March in 2022. For the interest rate hike, the Fed may continue to move with hesitation while the pandemic has not yet over, employment has not yet been sufficient and supply chain bottlenecks remain.
Large internal divergence, unpredictable pace of the Fed rate hike
There are disagreements within the Fed on how to deal with inflation. Some officials believe that early tightening will not only solve supply chain bottlenecks but also easily stifle economic recovery. With the improvement of the pandemic, they believe if the Fed stays patient in the face of high inflation, it could recede on its own. At this moment, the Fed's rate hike will not only be unable to solve supply chain bottlenecks and other temporary problems that push up prices but slow down the pace of job creation and economic recovery. Other officials believe that Taper should be sped up. The Fed may begin raising the interest rate in mid-2022 when the US economy is expected to return to full employment. The Fed is likely to double the pace of Taper in January 2022 and end it before April 2022 to provide more room for interest rate hikes.
Given the current inflation situation in the US, the Fed's continued bond purchases have brought very little help to the US economic recovery, and also don't have much positive signification to the operation of the financial markets.
Second, ending bond purchases as soon as possible could leave ample room for interest rate hikes and help reduce the risk of overheating the economy.
Looking forward, there is a possibility that the Fed will announce an accelerated Taper after the FOMC meeting in December. For example, the fastest way is to increase the monthly amount of bond tapering from the current $15 billion to $30 billion, and the end of bond purchases will correspondingly be moved forward from June to March next year.
On the whole, the Fed may speed up Taper appropriately, but the specific pace still needs to be determined by the situation.
The COVID-19 in Europe and America are on the rise, interest rate hikes will be more cautious
The European pandemic has rebounded again, and the trend of the global winter pandemic is uncertain. Central banks may be more cautious about raising interest rates. Under the influences of multiple factors such as lower temperature, looser control, and slower vaccinations, the pandemic has rebounded rapidly in many European countries and also has tended to rise slightly in the US. As the US lifted the travel ban for European visitors in early November, the possibility of the European pandemic spreading to the US cannot be ruled out with unimpeded air traffic between Europe and the US. In the context of the greater uncertainty about the winter pandemic, it is expected that the Fed will not be very aggressive on the issue of interest rate hikes.
Conclusion
It is temporarily uncertain how the Fed will end asset purchases and raise the interest rates, especially in the current situation where the US inflation far exceeds expectations, the financial markets generally believe that the Fed may misjudge the inflation situation. Market volatility caused by expectation gaps may increase significantly when the action is too late and the intensity is too weak.
According to data released by the National Interbank Funding Center on Monday, the one-year LPR came in at 3.85 percent, and the five-year LPR was at 4.65 percent; both have remained unchanged for 19 consecutive months. China's monetary policy remains sound.
Two major causes
The LPR did not change this time is mainly caused by two major factors. One is that the reference benchmark MLF rate; two is that the market rate.
First of all, since August 2019, the PBOC formally implemented the loan interest rate market reform. LPR is provided by 18 quoting banks submitting their quotes before 9:00 a.m. on the 20th day of every month (postponed in case of holidays) to the National Interbank Funding Center (NIFC). These quotes are formed by adding points to the open market operation rate (mainly MLF rate) and finally compiled and publicized by the NIFC.
After forming this market-based quotation mechanism, China's LPR is basically formed based on adding points to its MLF rate. At present, MLF in the Chinese market is a maturity of one year in most cases, reflecting the average marginal cost of funds for the banking system to integrate medium-term base money to the central bank. At the same time, the extent of the point addition depends mainly on factors such as each bank's own cost of funds, market supply and demand, risk premiums, etc.
On November 15, PBOC announced that to maintain a reasonable abundance of liquidity in the banking system, PBOC conducted a 1,000 billion yuan MLF operation on November 15, 2021 (including the renewal of two MLF maturities on November 16 and 30). The term of the MLF is one year, and the interest rate is 2.95 percent, flat compared to the last time.
In this regard, Ming Ming, deputy director with the research institute with CITIC Securities, said, "The benchmark for LPR quotes was left unchanged on November 15 when the central bank renewed the MLF in full at one time and kept the MLF operating rate the same. Historically, the LPR had moved in tandem with the MLF in all cases except for September 2019 when the one-year LPR was cut by 5BP against the backdrop of no change in the MLF rate."
Generally speaking, if the MLF rate does not move in the current month, the LPR offer will also remain stable. The unchanged MLF rate in November means that the probability of LPR offer adjustment in the current month is small, and the unchanged LPR is in line with market expectations.
Next, LPR is typically not prone to volatility when market rates remain stable.
As of November 22, the average 7-day rate (DR007) in November was 2.12 percent, 7BP lower than last month, but the overall change was not significant; the average one-year interbank deposit issue rate in November was 2.78 percent, flat from last month. The overall market interest rate remained stable, which means the probability of LPR offer adjustment in November is also relatively small.
At present, it seems that China's monetary policy overall remains prudent.
Market Outlook
LPR is now the benchmark for lending rates in the Chinese banking industry. Most Chinese financial institutions are currently lending based on "Corporate lending rate = LPR quote + Spread."
According to statistical collation, the weighted average interest rate on loans in September was 5. 00 percent, up 0.07 percentage points from June; the weighted average interest rate on ordinary loans was 5.30 percent, up 0.1 percentage points from June; the weighted average interest rate on corporate loans was 4.59 percent, up 0.01 percentage points from June; the weighted average interest rate on personal housing loans lifted more, from 5.42 percent to 5.54%.
Zhang Jiqiang, deputy director of the research institute of Huatai Securities, said: "From indicators such as the credit demand index and bill financing, the loan demand in the third quarter was significantly downward, but the loan interest rate rose. It mainly comes from the change of loan structure. As of the end of September, the year-on-year growth rate of medium and long-term loans in the manufacturing industry was 37.8%, and the year-on-year growth rate of small and inclusive loans to micro and small enterprises was 27.4%, both of which were significantly higher than the growth rate of all loans in the same period, and this part of loan interest rate is likely to pull up the average level; coupled with the fact that the LPR quotation was not lowered after the July downgrade, it reflects that the space for further compression of bank spreads is relatively limited. "
Ming Ming, deputy director with the research institute with CITIC Securities, said, "In the context of the four-quarter downgrade, GMLF interest rate cut expectations have fallen short and the lack of guidance for lowering interest rates, there is inadequate room for LPR downward adjustment."
Although there is inadequate room for a downward adjustment of LPR and the probability of a policy rate cut before the year is low, it does not mean that LPR quotes will remain unchanged.
Recently, at a symposium on China's economic situation for experts and entrepreneurs, Premier Li Keqiang expressed that the current economy is under new downward pressure. Meanwhile, the PBOC deleted "managing the general monetary gate" and added "enhancing the stability of total credit growth" in the "Third Quarter Monetary Policy Implementation Report," which indicates that the tone of monetary policy is easing.
China's central bank may cut rates again before the end of the year to incentivize banks to increase credit input against the background of the demand for more economical spending and easing monetary policy tendencies. The possibility of a downward adjustment of the one-year LPR quotation will grow at that time.
The U.S. debt ceiling issue keeps simmering over time while the two parties' views still differ widely, that may weigh on the dollar. In addition, although three Fed officials hinted at accelerating the tapering asset purchase, this did not support the dollar. Besides, Europe is "at the epicentre" of the Covid pandemic, Austria has today imposed a national lockdown, Germany may follow suit. Even European countries may start a new round of lockdown, depressing the economic recovery of the Eurozone.
The U.S.
The CPI hit a 31-year high in October, broke the previous conclusion that the U.S. inflation had peaked. This data indicates that U.S. inflationary pressures remain strong at this stage. The business outlook is less promising as higher costs and hiring difficulties have led to lower sales and profits. At the same time, high inflation also affects consumers. The Michigan Consumer Confidence Index plunged 4.9 points to 66.8 in November, the lowest level since November 2011. The labor market remains undersupplied. There are currently 10.4 million job vacancies in the U.S., down 660 thousand from two months ago, but well above the pre-pandemic level of less than 8 million. The number of resignations has reached a new high of 4.4 million, while the separation rate hit a record high of 3.0 percent. Some media called this "a wave of departures", leading to a gradual slowdown in recruitment.
It is concerned this week that President Biden previously said "the Fed Chairman's nomination" would be confirmed before Thanksgiving. The Fed's two vice chairmen, Clarida and Quarles, have already determined to resign, along with the original position of the successor to the presidency. That says, the FOMC may have four open positions, directly relating to the White House's "control" on the Fed. The successive presidents have always done this through appointments that match the Fed's monetary policy with their own.
Apart from this, the U.S. debt ceiling issue is gradually simmering and catches much attention. The U.S. Senate passed a bill to slightly raise the federal government's statutory debt ceiling on October 7. Now, less than a month later, the two parties remain divided.
The main reason for the current disagreement is due to political factors. In short, the Republicans gained political points for the midterm elections by resisting negotiations on the debt ceiling. While the Democrats, taking charge of the White House and both houses of Congress, can raise the debt ceiling but is hesitating about the way to keep the political cost at a reasonable level and pave the way for the 2022 midterm elections. After all, the accumulated stock of debt was caused by the previous Republican administration (Donald Trump). If the Democrats raises the debt ceiling and defused the crisis by a budget mediation, this late "political bill" will have to be blamed on the Democrats. The Republicans may make a big fuss about the "fiscal indulgence".
As the time approaches, it is expected that the debt ceiling will gradually become an important factor influencing the greenback movement.
Fed officials Clarida, Waller, and Bullard are hinting at accelerating the pace of asset purchases tapering, which may trigger market expectations. However, the impact may be slightly reduced as Clarida has been determined to leave after the term. Being a Fed's most dovish member, Bullard changed his attitude unexpectedly on the Fed's tilt, that is, stating hawkishly but moving dovish. The Fed will release meeting minutes this week, we can concern the officials' follow-up attitude.
The UK
The market's "speculation" about the Bank of England(BOK)'s rate hike in December need to be watched closely. Although only two officials supported to hike rate at the November policy meeting, this did not dampen expectations. On the one hand, the UK's GDP growth in the third quarter was only slightly lower than expected; on the other hand, the high inflation could force BOK to act earlier. In particular, the GDP was driven almost entirely by household consumption, indicating the strength of the UK consumer market . In addition, last week the ILO(International Labour Organization) data showed impressive, with a significant increase in hiring, temporarily easing the labor market's weakness. This also gave the market a reason to "hype".
The Eurozone
The Eurozone has been hit by various crises lately. First is inflation, which has surged to over 4 percent in the Eurozone due to higher energy prices, while energy inflation accounted for half of overall inflation in October. Then is the COVID-19 pandemic. Europe is once again "at the epicentre" of the Covid pandemic. Austria imposed a national lockdown on Monday; Germany is likely to follow suit; the Netherlands has ordered early closures of shops and bars, these have caused a bearish impact on the euro.
Inflation is largely certain to remain high at least the end of the year. Higher energy prices, supply chain bottlenecks, and other factors will all contribute to inflationary pressures. The Market is not expected to focus on the central bank's monetary policy as European Central Bank President Lagarde has made it clear that she will not follow the pace of the Fed's tapering. However, high prices from high inflation are bound to be passed on to consumers by businesses, as a result, the subsequent economic data is expected to weaken. This may weigh on the euro. To fight the COVID-19 pandemic, other countries in the Eurozone will follow the measures Austria made, which will exacerbate supply chain disruptions, leading to higher-than-expected wage growth, greater price pressures, and higher inflation. This is a vicious circle. The persistently high inflation could make a premature tightening of the financial environment, thus dragging down the economic recovery.
Japan
Japan has not had much attention at the moment. Last week, Japan launched a new economic stimulus package of 55.7 trillion yen. Earlier, Japan's real GDP slumped at an annual rate of 3% in the third quarter. This was another negative growth in the Japanese economy following a significant decline in the first quarter. The severe situation has forced Prime Minister Fumio Kishida's cabinet to speed up the introduction of economic stimulus policies.
However, the market believes that the current stimulus package has a limited effect due to nothing new. In addition to strengthening the medical system, enhancing the capacity to respond to the pandemic, and providing assistance to vaccine and drug development firms, the main measure of the new program is to distribute a wide range of subsidies. Of this massive program, only about 20 percent is related to the growth strategy, while spending on the pandemic accounts for nearly 60 percent. Overall, the subsequent impact on the yen was modest.
Key Datas for This Week
Monday
23:00 Eurozone Consumer Confidence Index(Nov)
U.S. Existing Home Sales(Oct)
Tuesday
17:00 Eurozone Markit Manufacturing PMI(Nov)
17:30 U.K. Markit Manufacturing PMI(Nov)
22:45 U.S. Markit Manufacturing PMI(Nov)
Wednesday
05:30 U.S. API weekly crude stocks(As of Nov 19)
09:00 New Zealand Federal Reserve Announces Rate Decision
21:30 U.S. Initial Jobless Claims
U.S. Annualized Real GDP Revision(The Third Quarter)
U.S. Durable Goods Order MoM(Oct)
23:00 U.S. UMich Consumer Confidence Index Final(Nov)
Thursday
15:00 Germany GFK Consumer Confidence Index(Dec)
19:00 U.K. CBI Retail Sales Differential(Nov)
Friday
07:30 Japan CPI(Nov)
16:00 Swiss GDP(The Third Quarter)
Recently, the "China Statistical Yearbook 2021" published on the official website of the National Bureau of Statistics of China showed that the birth rate of China in 2020 was 8.52‰, which fell below 10‰ for the first time and the lowest level since 1978. Besides, China's one-year natural population growth rate (Birth minus Death rates) was just 1.45 per 1,000, also created a lowest level since 1978. The release of the population data has once again triggered public opinion in China on the domestic population issue. (Note: Population data of Hong Kong SAR, Macao SAR and Chinese Taiwan are not included)
The aggravation of the population problem
On the surface, China's population is still increasing, but the circumstance has become more severe. It reported that repectively compared with the previous year, there was an increase of 5.3 million people in 2018, 4.67 million in 2019, and 2.04 million in 2020. At the same time, China's huge population which was born in the last century will gradually enter the aging stage, so it is difficult to maintain the current working-age population ratio with an annual increase of less than 10 million. Therefore, it can be said that the labor force of the right age is declining. Moreover, the decrease in the new population will lead to aggravation of the aging society, and the problem of labor shortage will be exposed more quickly. This will not only impact the social pension system, but will also have a negative impact on economic development.
According to the historical data, the birth rate in 2020 was about only a third of that was at its peak in the 1980s, while the natural growth rate has shrunk to less than a tenth. According to this trend, considering the gradual deepening of China's aging, people are worried about the negative population growth. In short, the number of elderly deaths will exceed that of newborns, and finally leading to a decrease in China's population.
Population and Economy
Chart 1: China GDP annual growth rate
As shown in the chart above, China's economic growth rate, like the natural population growth rate, is gradually slowing down. Some scholars pointed out that the speed of China's economic development to a large extent depends on the settlement of population problems, including population quantity, quality and structure problems. In addition, the latest population data allows the public to focus on Chinese population size and structure problems.
The demographic problems faced by Japan can provide a valuable reference for China. At the same time, China's latest population data is pushing the expectations of a decline in the young population and making people concern about the economic impact caused by the population decline of the young generation. Moreover, the economic impact includes numerous aspects. On one hand, as a large part of consumption comes from the young population, the decrease of it will restrain the consumption and lead to a sluggish one. On the other hand, with fewer young people or babies born, the demand for houses will decline, which will give rise to the impact on the real estate market, which is also not conducive to steady economic growth. In addition, the decrease in the new population, coupled with the gradual deepening of aging and the decline of working-age workers will not only lead to labor difficulties for enterprises but also mean that working-age workers need to bear a greater burden of pension. Therefore, China urgently needs to reverse the declining birth rate to avoid economic stagnation condition happened in Japan.
Promote balanced population development
Some analysts said that in the long run, to promote the long-term balanced development of the population, the government should carry out work from three aspects. One is to further improve the childbirth policy and supporting measures to reduce the cost of childbirth, nurturing and education as much as possible. The second is to steadily advance policy reforms such as delaying retirement. The third is to improve the level of national education and health, as well as constantly improve the quality of the population and tap the talent dividends.
So far, the Chinese government has taken some concrete measures in such three aspects. On the first point, in terms of the nurturing cost, the government has introduced housing price restrictions and other relevant measures. For the cost of childbirth, they have implemented the three-child policy, guaranteed the eight-hour working day and protected the right to have maternity leave. Concerning education costs, out-of-school education institutions and remedial classes have been reorganized, the education-related household expenses will also gradually reduce. For the second point, the basic policy framework for delaying retirement has been released. Regarding the third point, based on the current huge base of college students, the government has transformed the demographic dividend into an engineer dividend through industrial upgrading.
Conclusion
China's population problem is becoming increasingly complicated. The latest population data is pushing the expectations of a decline in the young population and making people worry about the economic impact caused by the population decline of the young generation. In the long run, promoting balanced population development will keep China's economy promoting steadily again. The Chinese government has taken some measures to address the population problem, such as promoting the demographic dividend into the engineer dividend may be the best approach.
Since the COVID-19 pandemic outbreak, economies around the world have experienced varying degrees of recession. Governments have been swinging between fighting the pandemic and economic growth. With the onset of winter, the global covid-19 situation has further deteriorated, with the pandemic situation in Europe once again becoming the new focus.
According to the latest data, the global cumulative number of confirmed cases is about 257 million, with 19.93 million existing confirmed cases, 232 million cumulative cures, and 5.16 million cumulative deaths. The United States, India, Brazil, Russia, and the United Kingdom still occupy the forefront of the number of infected people in the pandemic. With the gradual easing of coronavirus restrictions in European countries, the epidemic has resurged. Europe has now become the first region globally to have more than 500,000 new cases of deaths.
The Status of The Epidemic in Europe and Government Initiatives
According to reports, as of 15:00 on the 17th, the cumulative number of coronavirus deaths reached at least 500,069 within 52 countries and territories in Europe. This compares to nearly 37,000 deaths in Europe in the previous seven days, the highest number of patients killed in a single week since the outbreak began.
Germany. Data released by the German CDC agency Robert Koch Institute on the 19th showed that country had added 52,970 new cases, reaching 5,248,291 total cases; 201 new deaths, reaching 98,739 total deaths. Among them, Germany's official "morbidity index" used to monitor the outbreak's severity rose to 340.7 that day, the twelfth consecutive day since the outbreak of the country's extreme value. Since the 13th, residents in Germany have been allowed to get one free rapid coronavirus test per week, regardless of whether they have been vaccinated or infected with the coronavirus. Starting on the 14th, Germany has classified Austria as a high-risk area for the outbreak, and all unvaccinated persons from Austria entering Germany must be quarantined. As of the 15th, unvaccinated persons in Berlin will not enter catering institutions, gyms, hair salons, etc. A negative virus test certificate will no longer be recognized.
France. Epidemic indicators in France are still deteriorating, and the spread of the coronavirus is accelerating. According to official French data, on November 17, there were 20,294 new cases, hitting a new high since the end of August, reaching 7330,958 total cases and 118,321 total deaths. Once again,France's average daily cases exceeded the 10,000-case mark, reaching 10,023 cases; the incidence across France continues to rise, now exceeding the 100 infected per 100,000 residents mark, twice the warning threshold, reaching a new high since September. France announced on the 11th that it had tightened restrictions on arrivals from Belgium, Austria, Germany, Greece, Hungary, Ireland, the Netherlands, and the Czech Republic. Travelers from these eight countries without completing their vaccinations must submit proof of a negative coronavirus test within 24 hours of entering France, instead of the previously required 72-hour negative proof.
Greece. The Greek National Public Health Organization announced that in the past 24 hours, Greece added 8129 new cases, reaching 847,188 total cases; added 80 deaths, reaching 16,923 total deaths.
Italy. Italy has accumulated 4925,688 cases, with 11,540 daily new cases and 133,177 cumulative deaths. Italy plans to shorten the validity of its "green pass" from 12 months to 9 or 6 months starting in December to encourage vaccination of those eligible for the vaccine booster, which will begin on December 1 for the over-40 age group.
Austria. The Austrian Prime Minister announced that as of 15, people over 12 years old without a vaccination certificate or medical proof that indicates the holder has recovered from the virus must self-quarantine. Austria becomes the first country in Europe to impose a blockade on unvaccinated people.
The Netherlands. On the 13th, the Netherlands returned to strict restrictions for three weeks until December 4. During this period, restaurants, supermarkets, and essential stores must close at 8 pm, non-essential stores have to close at 6 pm, soccer matches are held behind closed doors, and public demonstrations are banned, prioritizing telecommuting mode. No more than four people may be received at home, but schools remain open.
Latvia. One of the least vaccinated countries in the European Union, Latvia is the first country to reimpose lockdown in Europe's new Covid wave. The government has announced three months of health emergency since Nov. 3. Masks must be worn at institutions that receive the public during the period, and all public sector employees must get vaccinated. The Latvian parliament also voted on 12 November to ban parliamentarians who refuse to be vaccinated from attending and voting and suspend their salaries as of 15 December.
Norway. The Norwegian government lifted all restrictions at the end of September, but on the 12th of this month, approved the introduction of a "health pass" for municipalities and opened up the vaccine booster to the adult population. Health workers who have not been vaccinated should be tested twice a week for coronavirus and wear a mask.
Shockingly, demonstrations took place in several European countries, including the Netherlands, Belgium, and Austria, due to dissatisfaction with the authorities' preventive measures against the epidemic outbreak. Europe is once again caught in the vortex of the epidemic, severely limiting the pace of economic recovery. The main reason for the resurgence of the outbreak in Europe is the ineffective prevention of the government and the lack of cooperation from the public, plus the severe cold weather that has made prevention and control more difficult. The epidemic is not expected to be effectively contained in the near future.
This article is excerpted from Comments on The Biden Administration's Fiscal Policies by Zhang Ming, deputy director of Department of International Finance, Institute of World Economics and Finance. Those who are interested in the full text can read it on the China Chief Economist Forum (CCEF).
The spillover effects of the trade process
In the process of trade, the conduction of fiscal policy will form an expenditure switching effect and expenditure conversion effect.
The expenditure switching effect means that the change of fiscal policy will change the domestic consumption and investment of the original country, and then affect the trading partners, and thus have a direct impact on their import demand. The expenditure conversion effect refers to the effect of a fiscal shock through changes in the real exchange rate, which may trigger a substitution between domestic and foreign consumption of goods.
As the U.S. consumers spending rose as a result of fiscal expansion, some of that spending will flow abroad, for example, to buy foreign goods or to spend on services, including travel——which should start to rebound when pandemic restrictions are eased, with countries with closer trade ties to the U.S. will be more affected.
At present, from a global perspective, China's supply chain and the whole industry chain have a leading edge in resuming production. In particular, due to the repeated outbreaks of COVID-19, some emerging Asian economies have been forced to reintroduce social distancing measures, hampering the restart of local economies. This has extended the dividend of China's export order transfer from the end of 2020, even as some of the orders that had been diverted to some East Asian countries have returned to China. For example, China's export to the U.S. maintained rapid growth from January to May, with a growth rate of 38.9%.
If the U.S. recovery is much stronger than that of its trading partners, then the U.S. spending is more likely to spill over to the rest of the world. Often, the existence of spillovers effects is a powerful incentive for governments to coordinate their stimulus with each other, so as not to get a free ride on the U.S. fiscal expansion by some fiscal tightening country. Free-rider countries could get in trouble with the U.S. Treasury, as the Biden administration has promised to get tough with countries that have long-run large trade surpluses with the U.S.
Spillover effects in capital flows
Under international capital flow, domestic fiscal policy can affect the foreign financial environment, and thus produce a financial channel of fiscal policy spillover.
Financial channels depend on the ability of domestic firms, financial intermediaries, and households to trade domestic and foreign assets with the rest of the world. Because of international capital flows, the savings and consumption decisions of domestic economic subjects will reflect returns on domestic and foreign assets.
The fiscal expansion causes spillover effects by changing global financial conditions by causing financial variables to react. As a large economy, changes in the U.S. fiscal policy will affect global interest rates, foreign exchange rates, and the yield curve, which changes because the U.S. policy changes are perceived (or are confirmed) to affect fiscal sustainability.
Financial channels in contrast to the trade channels: the influence of the U.S. expansionary fiscal shock can lead to higher interest rates and exchange rate appreciation, if countries affected by the spillover effect have the problem of currency mismatch, it could incur more dollar borrowing costs and cause deterioration of the balance sheet, resulting in a negative spillover effect, bring pressure to maintain financial stability.
However, at present, in order to implement expansionary fiscal policies, low-interest rates in the U.S. to some extent offset the spillover effects brought to China through financial channels, making the asset allocation value of CNY bonds, mainly national bonds, policy-based financial bonds, and interbank certificates of deposit, further strength. The amount of CNY bonds held rose from CNY 399 billion in December 2013 to CNY 3,652.1 billion in March 2021.
Conclusion
In response to COVID-19 and its impact on the economy, the U.S. fiscal policy became the only insurance mechanism against systemic events. At present, however, the U.S. fiscal policy faces a twofold challenge: on the one hand, it must address the sharp contraction in economic activity and adopt fiscal stimulus to mitigate the real impact of the crisis on the economy. On the other hand, maintaining the sustainability of high debt.
Long-term large fiscal deficits and very high government debt rates raise the ghost of fiscal dominance, which will highlight the relationship between fiscal policy, monetary policy, and government debt management. The implementation of fiscal expansion in the U.S. may induce inflation, damage the credibility of the Fed’s independence, and threaten the sustainability of the U.S. government debt. When the financial market doubts the sustainability of the government debt, the liquidity and even solvency of financial institutions may deteriorate, which in turn may undermine the stability of the financial industry.
From the aspect of the past experience, if the U.S. economy is indeed close to overheating, then demand-deficient countries will act as a relief valve for the build-up pressure in the U.S. The development of trade has weakened the link between changes in domestic demand and corresponding changes in aggregate output because net exports have acted as a significant moderator to changes in domestic spending. An expansionary fiscal shock in the U.S. would lead to higher interest rates and exchange rate appreciation, and if countries affected by the spillover effect have the problem of currency mismatch, it could incur more dollar borrowing costs and cause deterioration of the balance sheet, resulting in a negative spillover effect, bring pressure to maintain financial stability.
(Source: http://www.chinacef.cn/index.php/index/article/article_id/8592)
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