Hotspot Engine Program
The world is raising interest rates, but why is China cutting them? Could it be that China has some mysterious tricks?
The domestic five-year interest rate fell directly to 275%, while the United States has gone from 0% to 55%。It is a well-known fact that every US interest rate hike brings a wave of economy**. The U.S. interest rate hike seems to be "reaping leeks" for other countries, but in fact, this practice not only hurts other countries, but also harms the United States itself. At present, five banks in the United States have declared bankruptcy, and another 190 banks are at risk of failure.
Why, then, do U.S. interest rate hikes always benefit other countries and cause crises? In the context of global interest rate hikes, why can China buck the trend and choose to cut interest rates? What is the logic behind this? Let's do it in an easy-to-understand way.
First of all, as we all know, the US dollar is a global currency, and the monetary policy of the Federal Reserve affects the flow of global capital. When the Fed raises interest rates, global capital tends to flock to the United States. For example, imagine that Master Li has 100 million funds in a British bank with an annual interest rate of 1%. Suddenly, the US raised interest rates, the deposit rate rose to 3%, while the UK interest rate remained unchanged. The clever Master Li will choose to transfer all the funds to the United States, because this can earn an extra 2 million in interest a year. A shrewd person like Master Li would carry out interest rate arbitrage operations, which led to a massive outflow of money out of the UK, which was "Richard's escape".
In order to arbitrage interest rate differentials, it is necessary to first convert the pound into the US dollar, in which the pound depreciates and the dollar rises. Currency depreciation brings inflation, as many commodities are denominated in US dollars. For example, the original price of a pair of shoes was $10, which is equivalent to £9, but now that the pound has depreciated, the same shoes cost £10. For British consumers, goods have become more expensive. In addition to inflation and capital outflows, other countries are likely to be forced to follow suit with interest rate hikes, which will directly harm the real economy.
Let's say you want to invest in a project with a return of 110%, you need 5 million, the bank interest is 5%, you have signed a loan contract, and you will make a net profit of 750,000 after a year. However, when the domestic interest rate hiked, the interest soared to 15%, and the risk profit of the same project was only 250,000. Many people will choose to keep their funds in the bank to earn interest, resulting in fewer businesses and projects, higher unemployment, and damage to the real economy. In addition, interest rate hikes could trigger problems such as financial markets** and even a global debt crisis.
So why did China choose to cut interest rates at this time? The reason is simple, the domestic economy is sluggish, a lot of production capacity is idle, and long-term direct sales will lead to production stagnation, a surge in unemployment, and an economic crisis. Therefore, interest rate cuts are conducive to the inflow of funds into the investment sector and the real economy, and are also conducive to stimulating consumption. In the long run, the market risk-free rate will continue to decline, and the future investment environment will be full of risks, and ordinary people are prone to a dilemma. At this time, we can learn from the "barbell strategy" and make trade-offs in asset allocation. 90% of the funds are used in low-risk, low-yield assets, such as currencies**, bonds**, etc.; Use 10% of your capital in high-risk, high-yield assets. Although it is a bit risky, it only accounts for 10%, and even if it loses, it is not significant, and the potential for profit is huge.
In the context of US interest rate hikes, what is the logic of China's choice to cut interest rates instead of raising interest rates? To understand this question, we need to review Mundell's theory of impossible triangles. According to this theory, independent monetary policy, exchange rate stability, and complete free movement of capital cannot be achieved at the same time. Only by maintaining the independence of monetary policy can China independently control domestic economic development and reduce the risk of being "cut leeks" by the United States. The opposite move with the Fed is precisely because China's exchange rate fluctuations are not entirely market-driven, and a certain amount of capital controls are retained, allowing monetary policy to be independent.
In conclusion, in the context of global interest rate hikes, China chose to cut interest rates rather than raise them because it maintained monetary policy independence and reduced the risk of being affected by US interest rate hikes through a series of measures. At the same time, China's interest rate cut aims to activate economic growth and promote capital into the real economy and consumption. The future investment environment may be fraught with risks, but with a sound asset allocation strategy, we can meet the challenges and find a balance between low risk and high yield to grow our wealth.