How to Understand the Differences Between A-Shares and U.S. Stocks? - Huxiu.com#
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In fact, this is a larger cycle. In the past few years, we have suffered serious setbacks because of this cycle, and in the future, we will also gain enough rewards from this cycle. ⤴️ ^43d8ab98
This article explains the differences between A-shares and U.S. stocks from the perspective of the differences in the monetary systems of China and the United States. The article points out that the core difference between the monetary policies of China and the United States lies in the fact that the People's Bank of China does not allow the capital market to operate on autopilot, while the Federal Reserve in the United States mostly allows the capital market to operate on autopilot. This has led to the separation of voting rights and execution rights in A-shares, while the monetary policy of U.S. stocks is more smooth. Based on this, the article mentions the impact of monetary system arrangements on the stock market, as well as the balance between the counter-cyclical and cross-cyclical nature of monetary policies in China and the United States.
• 💰 There are fundamental differences in the monetary systems of China and the United States, resulting in differences in voting rights and execution rights in monetary policies between A-shares and U.S. stocks.
• 📉 The instability of A-shares is mainly due to the inability of the capital market to operate on autopilot, and it needs to passively bear the combined impact of monetary policies in China and the United States.
• 📈 The Federal Reserve allows the capital market to operate on autopilot, which enables U.S. stocks to have a long-term bull market and maintain an overall upward trend during interest rate hike cycles.
At the beginning of 2024, A-shares experienced a continuous adjustment, with the Shanghai and Shenzhen 300 Index falling by 4.23% in five trading days.
Investors were not happy, so they started comparing A-shares and U.S. stocks. On the one hand, they complained about A-shares; on the other hand, they praised U.S. stocks.
Of course, this is just an emotional release. In this process, two serious questions were raised:
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Why can U.S. stocks have a long-term bull market?
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Why can U.S. stocks maintain an overall upward trend during interest rate hike cycles?
This article intends to answer these two questions from the perspective of monetary system arrangements.
I. Differences in the Monetary Systems of China and the United States
There is a fundamental difference in the monetary systems of China and the United States. The United States has an expected guidance monetary system, while China has a target-constrained monetary system.
This leads to significant differences in the distribution of voting rights and execution rights in monetary policies between China and the United States.
As shown in the above figure, China's capital market has the voting rights of monetary policies, but it does not have the execution rights of monetary policies; the U.S. capital market has the voting rights of monetary policies, and some shares the execution rights of monetary policies.
Under the framework of China, the capital market fully expresses its expectations for monetary policies through the ten-year government bond dimension.
As shown in the above figure, the ten-year government bond yield has been continuously declining, indicating a loose market expectation. However, the execution rights of monetary policies are not in the hands of the market, but with the central bank. The decision-making function of the central bank is more complex, as it needs to consider the voting results of the market as well as other variables.
Therefore, the one-year certificate of deposit rate remains high at 2.46%. It is precisely because of the separation of voting rights and execution rights that a result is obtained: the transmission chain from loose expectations to loose implementation is not very smooth. The specific manifestation is that the term spread is low or even inverted.
However, the situation in the United States is very different from that in China. Since the two-year U.S. bond yield is determined by the framework of guidance from the Federal Reserve and market execution, the conflict between voting rights and execution rights is not so intense. We often observe the scenario where the ten-year U.S. bond yield and the two-year U.S. bond yield adjust synchronously.
II. The Impact of Monetary System Arrangements on the Stock Market
Through the above discussion, we can summarize that the core difference between the monetary policies of China and the United States is that the People's Bank of China does not allow the capital market to operate on autopilot, while the Federal Reserve in the United States mostly allows the capital market to operate on autopilot.
So, what impact does this have on the stock market? The devil is always in the details.
As shown in the above figure, when the demand curve for money in the United States contracts, U.S. stocks will be under pressure, and economic data will also show some performance. However, since the Federal Reserve allows the capital market to operate on autopilot, the capital market will significantly expand the demand curve for money. The ultimate result is that the contraction in demand is offset by the expansion in supply, leading to a slight increase in the stock market and a significant decline in long-term bond yields.
As shown in the above figure, since Q4 2023, the two-year U.S. bond yield has declined significantly. This is the result of the autopilot operation of the U.S. capital market.
However, for the Chinese capital market, the situation is different. The capital market does not have the power to move the money supply curve.
When the demand curve for money contracts, the money supply curve remains in place. The result is that the ten-year government bond yield decreases slightly, while the stock market experiences a significant decline.
In fact, we don't need to talk about those big stories. Just from whether the capital market has the power to operate on autopilot, we can explain the following four phenomena:
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Why can U.S. stocks have a long bull market?
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Why do U.S. bond yields fluctuate greatly?
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Why does A-shares have high volatility?
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Why do A-bonds have a long bull market?
In fact, these four phenomena are interconnected.
III. The More Complex Three-Body Situation
Through the analysis above, we can see that it seems not so difficult to make A-shares have a long bull market, as long as the central bank can execute monetary policies more timely.
However, the reality is more complex. The main factors affecting the money supply curve in China also include the Federal Reserve. That is, China and the United States are not isolated, and the monetary policies of the Federal Reserve have a significant spillover effect.
From the perspective of the central bank, it needs to balance two serious issues: counter-cyclical adjustment and cross-cyclical adjustment.
- Counter-cyclical Adjustment
The central bank needs to respond to the call of the capital market and counteract the contraction of the domestic demand curve. So, how to characterize the degree of response? Look at the spread between the ten-year government bond yield and the one-year certificate of deposit rate. If this spread is high enough, it means that the central bank's monetary policy is more biased towards counter-cyclical adjustment.
- Cross-cyclical Adjustment
The central bank also needs to consider the constraints of a strong U.S. dollar. When the ten-year U.S. bond yield remains high, the domestic space for loose monetary policies is relatively small. Otherwise, we will face the dual challenges of capital outflow and currency depreciation.
So, how to balance both counter-cyclical and cross-cyclical adjustments? It is through pulse-like monetary easing.
As shown in the above figure, in Phase 1, counter-cyclical adjustment is the main contradiction, and the one-year certificate of deposit rate remains low; in Phase 2, cross-cyclical adjustment is the main contradiction, and the one-year certificate of deposit rate remains high.
The monetary policy oscillates between counter-cyclical and cross-cyclical adjustments like a pendulum, which is the only solution to balance the two.
Currently, the pendulum of monetary policy is swinging towards the counter-cyclical adjustment zone.
However, the swinging motion of monetary policy is disastrous for the stock market. It shatters the stock market, and the stock market can only passively bear the combined impact of monetary policies in China and the United States.
When the overall interest rate is in a restrictive range, what we see is that the Shanghai and Shenzhen 300 Index fluctuates downward, unless we are lucky enough to encounter a wave of counter-cyclical adjustments that lower the core interest rate to the restrictive range.
IV. Conclusion
To sum up, by understanding the differences in the monetary systems of China and the United States, as well as the strong constraints of U.S. monetary policies on the space of domestic monetary policies, we will not have so many grievances towards A-shares:
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The strong spillover effect of U.S. monetary policies has led to the separation of voting rights and execution rights in monetary policies by the central bank.
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Only when the central bank has complete control over the execution rights can monetary policies oscillate between counter-cyclical and cross-cyclical adjustments.
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A-shares are the residual variables of all these monetary system arrangements.
The reality is much simpler than what everyone imagines, and the truly complex points are not in the scope of everyone's attention.
This is a monetary problem, not in other aspects.
In fact, there is a solution beyond the monetary system, which is to synchronize the economic cycles of China and the United States.
If the economic cycles of China and the United States are synchronized, the conflict between counter-cyclical and cross-cyclical adjustments will no longer exist, and there is no need to separate the voting rights and execution rights of monetary policies. The response of the money supply curve to the contraction of total demand will be more timely.
Since 2023, many regional stock markets have performed well, which has deepened the grievances of A-share investors.
So, why does this phenomenon occur? Because their economic cycles are synchronized with the United States, China is one of the few economies that is not synchronized with the U.S. economy.
Therefore, the main reason why A-shares have suffered unprecedented setbacks is that the economic cycles of China and the United States have become unprecedentedly unsynchronized.
So, why are the economic cycles of China and the United States unsynchronized? This is a bigger topic that is worth studying.
Of course, this article is just the first step, grasping the bull's nose of the synchronization of the economic cycles of China and the United States. ==In fact, this is a larger cycle. In the past few years, we have suffered serious setbacks because of this cycle, and in the future, we will also gain enough rewards from this cycle.==
There is nothing new under the sun; everything is cyclical.
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