Since July 2024, an exciting and crucial game of interests has quietly begun in China's domestic bond market.
Since July, the bond market has continued to rally, with the yield on 10-year government bonds once reaching a low of 2.1%, and the market sentiment is strongly bullish.
Under these circumstances, the regulatory authorities have stepped in to strengthen the guidance and supervision of bond market transactions.
A thrilling tug-of-war between national will and capital power has officially begun.
The related content and logic have been published in a special article by this account for detailed combing and analysis, so I won't go into detail here.
The main topic of this article is to discuss with everyone a key question: as time has come to mid-August, what is the specific situation of this round of game between the country and capital?
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Faced with the attitudes and actions of the country and the central bank, there are still many financial institutions, banks, and funds that feel invincible and rush into the bond market like a death squad, regardless of the consequences.
The next question is: will the central bank let go?
If the central bank does not let go, what terrible things will happen?
This article will be based on a detailed combing of the current domestic bond bull market in China, especially the fundamental logic of ultra-long-term bonds, combined with reality, starting from the perspective of respecting common sense and laws, to deeply explore the key reasons and interest logic for the continuous bull market in the domestic bond market, and to conduct a deep, attitude-holding, and well-grounded special discussion and analysis on the possible actions and attitudes of the country and the central bank, as well as the direction of domestic capital and economic environment.
The bull market in the bond market needs to clarify the fundamental logic of the bond bull market, especially the ultra-long-term bonds.
The fundamental determinant of long-term bonds is the long-term interest rate; and the ultimate determinant of the long-term interest rate is the marginal rate of return on capital.
In other words, if a person has 1 million in his hands, the average expected return of all investable projects within the range of his vision and the entire society.
If he finds that the average expected return is not even as good as the ultra-long-term government bonds, he will definitely chase the ultra-long-term government bonds.
Because no matter what other projects he chooses, there are risks, but government bonds are risk-free.
If there is no certain risk compensation, he will definitely choose government bonds.
So what factors determine the marginal rate of return on capital in a society?
The first depends on the growth rate of the labor force, the second depends on the investment rate, and the third depends on technological progress; let's talk about each one in detail.
The first is the growth rate of the labor force.
Labor is actually the most important resource of a country.
On the one hand, it is a factor of production, and on the other hand, it is a consumer who will spend money.
The reason why the return on capital has been so high in the past two or three decades after the reform and opening up is that capital has been relatively scarce compared to labor.
Scarce capital is invested in the vast sea of labor; on the other hand, workers who earn money have formed a huge purchasing power that can accept the huge amount of goods produced; the combination of the two has formed a very high return on capital.
When the growth rate of the labor force declines, even if it is negative growth, and even if the entire population is in negative growth, it is definitely not conducive to the marginal rate of return on capital - first, labor will be scarce relative to capital, and on the other hand, consumption will decline.
Then let's talk about the second factor, the investment rate, to put it bluntly, it is to see whether there is an overinvestment.
For an economy that has long relied on investment to drive economic growth, the proportion of investment in GDP is very high, even it can be said to be abnormally high; low-level repetitive construction is easy to cause a decline in the marginal rate of return on capital.
When there is a lot of capital, the marginal rate of return is definitely decreasing, which is a basic common sense.
The third factor is technological progress.
This is very easy to understand.
For a late-developing industrial country, in its catching-up period, advanced technology and production management experience are readily available, and it can easily learn these things from developed countries.
However, after this historical period, that is, the catching-up period, the low-hanging fruits on the tree have been picked almost, technological progress will slow down, and the marginal rate of return on capital will inevitably decline.
Combining the above, we can know that if we want the bond bull market to stop and the yield on bonds to rise, the real way to solve the problem is to improve the growth rate of the labor force, to reduce the investment rate, and to improve technology and technology.
So what is the policy choice now?
In order to maintain a relatively stable GDP growth rate, we need to boost domestic demand.
There are two choices in domestic demand: investment or consumption - it is necessary to stimulate investment or to start consumption.
Starting consumption, or to say to improve consumption from the root, there are many complex problems to be solved, which is not as easy as stimulating investment.
For example, equipment renewal and urban village renovation are all investments.
However, a paradox has emerged.
Investment can indeed drive GDP in a short period of time, but it will further increase the already high investment rate, making the marginal rate of return on capital further decline.
In addition, because consumption is relatively neglected, the decline in consumption will further compress the profit margin space of enterprises, because overcapacity leads to internal competition.
When the profit margin of enterprises is compressed, they will have two choices: first, to reduce costs and improve efficiency, and reducing costs and improving efficiency will cause labor to be passively withdrawn from the market; second, they will choose to reduce investment in new technology, and to take "survival" as the first principle.
Therefore, the growth rate of labor force further declines, and technological progress will also slow down.
Combining the above, the 1, 2, and 3 factors of the marginal rate of return on capital all move in an unfavorable direction, so the long-term interest rate will tend to decline.
There are long-term factors, such as population; there are also short-term factors, such as policy choices.
So in this context, the bond bull market will become a natural result.
Of course, the above logic is based on absolute rationality and economic logic, and from a realistic point of view, the bond bull market, especially the formation of the continuous bull market in the bond market, is not a good signal for any country and economy, because the bond bull market is a typical recession trade: the main funds and wealth of the whole society have formed a consensus on pursuing safe and stable returns, and have gathered together to hold safe assets, so for other fields that need monetary liquidity support, such as assets, finance, and the real economy, it will form a stubborn tightening pressure.
This is actually very easy to understand.
From top to bottom, from large to small funds, they all buy bonds, do not invest, do not consume, and a vicious cycle will form.
Combining the current domestic economic environment and data performance, is it really the case?
The actual situation is that since 2024, China's government bonds have been sold out in the primary and secondary markets, and there is a shortage of supply and demand, and it is difficult to find a coupon.
Since July, the bond market has continued to rally, with the yield on 10-year government bonds once reaching a low of 2.1%, and the market sentiment is strongly bullish.
Under these circumstances, the regulatory authorities have stepped in to strengthen the guidance and supervision of bond market transactions.
From the perspective of the country and the central bank, it is definitely not a good thing for the "recession trade" to become a consensus of market funds.
No country and economy can tolerate such a consensus to exist for a long time, and it will lead to a continuous tightening in other economic fields, so it is inevitable to take action to reverse expectations.
In fact, this round of expectation reversal and market guidance officially began in August.
Here is a process combing for everyone: the central bank has repeatedly warned and reminded of risks since the beginning of the year, and has publicly warned through Chinese and foreign media.
The internal communication and exchange must have been several rounds, but no one listened.
So it started to increase the amount in June.
At the Lujiazui Financial Forum, President Pan clearly stated the future central bank's monetary policy position and direction, and the government bonds were repeatedly emphasized, but the institutions forgot them after listening.
After that, they still scrambled for government bonds, so the central bank launched a "borrowing and selling" deterrent in July, releasing signals intensively in a week, and communicated with domestic and foreign media.
Even considering that Chinese financial institutions pay more attention to foreign media reports, they also communicated with foreign media and clearly expressed the central bank's attitude.
Although the central bank has done its best, financial institutions just don't listen.
Financial institutions listened for a few days, and then continued to do their own thing, as if they were betting that the central bank, which has always been gentle, would not be willing to hit the child, let alone such a fierce action.
After shouting, it broke through the bottom line set by the central bank in just two weeks.
So the central bank finally took action.
There was a small composition circulating before the start of August 5th, saying that the central bank was preparing to sell a large amount of 10-year government bonds (bond code 240011) in the afternoon, and must raise the yield on government bonds to the level that the central bank is satisfied with, which may be a kind of trial balloon.
The central bank guided large commercial banks, policy banks, and joint-stock banks to sell 10-year government bonds, raising the yield, and everyone can directly understand it as a rescue market.
As a result, an amazing thing happened, and some institutions actually jumped out to be the central bank's opponents.
The central bank really thought too well of the financial institutions and seriously underestimated the courage and greed of the financial institutions.
So the central bank sold 20 billion of 10-year active government bonds (240011) through the four major banks at the beginning of August, and some large banks also sold 30-year government bonds (24 special national 01), and as a result, more than 10 billion were bought by rural financial institutions, that is, rural commercial banks.
The first day can be considered that some institutions didn't understand, but on August 6th, it was more severe, and on this day, the central bank continued to sell 50 billion according to the method of Monday, and as a result, rural commercial banks bought more than 30 billion net.
This kind of operation is obviously premeditated, and it is definitely not spontaneous.
It is very likely that some rural commercial banks have already predicted that the central bank will save the market in advance, so they have raised funds in advance, just waiting for the central bank to save the market.However, the central bank is truly enraged.
On Wednesday, August 8th, the central bank did three things: First, it escalated intervention measures, fully considering the greed and bottomless nature of financial institutions.
Second, the Interbank Market Association issued an urgent investigation notice.
It directly named four rural commercial banks in southern Jiangsu: one in Changzhou and three in Suzhou.
Third, it publicly issued a declaration, occupying the moral high ground.
Facts have repeatedly proven that some financial institutions are similar to those in the United States; they cannot understand polite conversation and require both communication and a carrot-and-stick approach.
The question arises, the bond market has gone crazy like this, and anyone with common sense can see that it has long been seriously detached from the fundamentals.
These institutions are all financial elites, can't they see it?
But why do they keep advocating that bond interest rates are reasonable?
Let's recall 2021 when institutions explained stock valuations.
For example, they calculated the valuation of CATL for 60 years later; they explained the valuation of Haidilao with the consumption upgrade that will last for another two to three decades; they explained the valuation of pharmaceutical stocks with the deep aging population 30 years later.
Anyway, at the top of the bull market, any high valuation is reasonable.
There are always people making up many stories to explain their rationality.
It's not ruled out that there are indeed fools within the institutions, but the reasons for the institutions to do so are more likely: 1.
They are caught up in a collective frenzy, and their thoughts and actions are highly conformist, no longer under their own control; 2.
To attract customers.
If you don't explain the rationality of interest rates (or valuations) based on fundamentals, how can you get customers to keep buying?
The current crazy bond market is fundamentally due to a large number of residents buying behind the institutions.
This provides institutions with a lot of ammunition to fight the central bank's short selling.
These institutions will tell residents stories of zero interest rates, stories of great deflation, stories of the Great Depression, stories of Japan losing thirty years, and stories of the certainty of profit from government bonds.
So, when are residents not the ones to take over the plate?
Now everyone can understand the root of the country's disgust with financial institutions speculating in the bond market?
Not only do they cluster together to buy with their own funds, but they also release negative signals to the market, guiding more resident assets and wealth to push the wave, leading to a further strengthening of the entire market's consensus on the "recession trade."
If there are higher-yield channels in the economic environment and the economic operation is stable and harmonious, how can the yield of government bonds create a supply-demand squeeze situation?
Therefore, although the central bank's round of education in early August made financial institutions converge for a few days, just a week later, the ten-year government bond interest rate made a big counterattack, and the thirty-year government bond interest rate even has a feeling of forcing the central bank to go short.
It is obvious that from the perspective of the market, the central bank is in a de facto disadvantaged position in this game.
Of course, the game has been formed, and the competition between the national will and financial institutions will definitely continue.
On Tuesday afternoon, the financial data for July was announced, and the data was very poor.
So the market put on its armor and "shorted" the Chinese economy.
At the end of Tuesday, it was rapidly lifted, and on Wednesday, it was even more excited to do so.
In the final analysis, it's still those two brainwashing reasons: first, interest rates will continue to go down, and money will continue to be loose; second, the economic fundamentals continue to be poor.
According to the current situation, the outcome of this round of the game may not be decent and good-looking.
There is basically no good result in playing against the country, and this is undisputed.
The interest rate of government bonds cannot be continuously lowered by financial institutions and social funds, and there is a limit to everything.
Therefore, the central bank still has many moves, but it is also assessing how to play cards.
The current domestic financial institutions and capital circles, to be honest, are a bit complicated, with many issues such as interest entanglement, external penetration, and collusion inside and outside.
If not handled properly, some institutions and funds may still be playing a deliberate enticement to do more.
In order to reduce the cost of short selling.
The current disadvantage of the central bank is that there are not enough effective bonds.
So it's not enough to rely solely on the method of borrowing and selling short.
The reality has also proved this situation.
Of course, the central bank still has many means and trump cards: 1.
Restrict market maker transactions to reduce liquidity; 2.
Punish and arrest people, and eliminate those institutions that play interest transfer, reducing the purchase order while also playing a deterrent role; 3.
Tighten money and raise the interest rate of funds, thereby increasing the cost of leverage; 4.
Increase the futures margin ratio and raise the liquidation fee, thereby rendering many neutral strategies ineffective; 5.
Catch the loopholes of institutions and then restrict their transactions.
How the central bank will play cards, the market is definitely unpredictable, but it is definitely the most concerned and focused research group for the current group of people who are speculating on bonds.
In fact, there is no imagination about the result.
For a country like China, where the national will has an absolute crushing power over capital, as long as the country is determined enough, it can easily control the capital that short-sells the Chinese economy.
The key lies in the timing of the move and the realization of the consensus of market expectations.
Starting from mid-August, the turnover of A-shares continued to decline, and the low volume came out again.
The real estate market, let alone, coupled with the contraction of the enterprise and resident sectors reflected in the economic data, all point to a common reality: the bond market fight, the liquidity in the economic environment has obviously dried up and tightened.
Behind this reality is that domestic institutions and capital in China are fighting with the central bank.
Once the institutions fight against the central bank, the institutions will sell stocks and buy bonds.
And they will also create expectations, guiding more private capital and savings to serve as a chip against.
However, from the perspective of the national macroeconomic management needs, this kind of confrontation is obviously intolerable and indulgent, and the regulation of the bond market is an inevitable trend.
If the bond market is not bearish, and the long-term bond yield cannot reverse the continuous downward trend, then the tight situation in the domestic economic environment of China cannot be reversed and changed.
Next, it depends on the means and timing of the country and the central bank, and the market situation, as long as the logical relationship is mastered, is the best observation window.
The matter is actually such a matter, not complicated.
In the economic society, all problems and contradictions can be solved as long as they return to the level of interests.
Looking at the current situation, this round of interest game around government bonds has obviously exceeded the expectations of the country and the central bank, and the authority that has been invincible in the past has also been obviously impacted.
Such a game, although the outcome is no suspense, but the trend will definitely be tortuous: either it will last for a long time, the process is difficult, and finally achieve a new balance; or it will be a heavy blow, and of course, some people will not be decent.
For China, questioning the attitude, determination, and strength of the country is a very foolish choice.
Therefore, based on this logic, it has already written the script and ending for the current group and funds that are having a good time in the bond market.
In the past year, China has been in a stage where bonds are king.
And the management hopes to "change the section" and end the stage where bonds are king.
But money always needs a place to go, so what will it be next, stocks are king, or commodities (assets) are king?
It is still not clear at present, but some price increases have actually started to quietly move.
From a long-term perspective, this "change of section" will come sooner or later.
But it is difficult to judge when it will happen.
The management obviously hopes that it will come as soon as possible.
This hot money sniper war around the bond market will continue.
Only when the hot money suffers a big loss can they turn back.
From the perspective of individual micro-entities, there is an important cognition: money is endless, and some money must not be earned.
If you really can't help but earn it, you must think clearly whether you can run away.
Everyone thinks carefully and feels it.
The above is a progress follow-up and special analysis and discussion on this round of interest game between the national central bank and financial institutions around the bond market in 2024, and shares and exchanges with readers and friends on the headline.
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