2024-08-06
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This issue is planned for the 069th issue of "Economics Talk"
Guest of this issue｜Sun Lijian, Director of the Financial Research Center, Fudan Development Institute
Author: Zhu Yuting
Editor | Liu Peng
On August 5, global stock markets crashed and the market ushered in "Black Monday". The Japanese stock market led the decline, with the Nikkei 225 Index and the Topix Index both closing down 12%. The latter even recorded the largest single-day drop since 1987, and the circuit breaker mechanism was triggered several times during the trading session.
On July 31, the Bank of Japan held a monetary policy meeting and decided to adjust the policy interest rate from 0%-0.1% to 0.25%. This rate hike is also the first rate hike since Japan lifted its negative interest rate policy in March this year, marking another step towards the normalization of Japan's monetary policy.
On the same day, the Federal Reserve announced at its July interest rate meeting that it would maintain the benchmark interest rate unchanged, but the speech of Federal Reserve Chairman Powell revealed the possibility of a rate cut in September.
Talking about the current round of Asia-Pacific stock market crash, Professor Sun Lijian, director of the Financial Research Center of Fudan Development Research Institute, has a different view from the market. He analyzed three aspects: 1) The deep adjustment of the US stock market will inevitably lead to the adjustment of the Asia-Pacific stock market. This is the spillover effect of the major adjustment of the US stock market. The higher the rise was before, the deeper the fall was today; 2) The interest rate hike by the Bank of Japan exceeded the expectations of all markets; 3) The market overreacted, so it was better to lock in profits first and then follow suit after the market stabilized.
Professor Sun stressed that the most important factor was the linkage brought about by the adjustment of the US stock market. "Technology companies in the Asia-Pacific region and US technology companies have formed a chain of cooperation." The US stock market was mainly at a bubble high.
Regarding the market's interpretation of the "Yen Carry Trade", Professor Sun believes that the market's view must be corrected. He pointed out that the preconditions for the carry trade are: Japan's interest rates must be low and the yen must be at a low level. However, the Bank of Japan is currently raising interest rates and the yen is also rising. "(The current situation) is obviously different from the preconditions." He said.
Does the plunge in Asia-Pacific stock markets mean that funds will flow into the Chinese stock market? Professor Sun believes that funds have not yet left the Asia-Pacific market. "As long as the adjustment of the US stock market continues, the Asia-Pacific stock market will follow suit, and there will be no reversal."
As for whether the Bank of Japan and the Federal Reserve will take measures to rescue the market, he said neither would. He believes that the Bank of Japan may continue to raise interest rates in the future. Japan's investment style tends to be safe, firstly because of the aging population, and secondly, in wealth management, they tend to choose deposits and high-quality bonds. They expect their money to be principal-protected and hope that the interest rate return can outperform the price.
The following is the full text of the conversation:
Tencent Finance:Why did the Asia-Pacific stock markets experience such a sharp drop? What are the main reasons?
Sun Lijian:The deep adjustment of Asia-Pacific stocks this time is mainly in the technology sector, which is very similar to the US stock market. So I think there are three reasons:
First, it was dragged down by the US stock market.A deep adjustment in the U.S. stock market will inevitably bring about adjustments in the Asia-Pacific stock market.
Why do I say this? Because the record-breaking valuations of Asia-Pacific stocks (whether in Japan, South Korea, or Taiwan) are all due to the spillover effect of U.S. stocks.
Today's sharp downward adjustment is also a spillover effect of the major adjustment of the U.S. stock market. The higher the previous rise, the deeper the fall today.
Why didn’t this happen before? The biggest reason is that the global economy is in a state of severe liquidity overflow and it has not yet recovered from the post-epidemic rebound.
In a word, there is a lot of money in the global economy today, but there are few opportunities for value investing. The only investment opportunities left are the semiconductor integrated circuits and digitalization led by the so-called "Seven Heroes" of US technology stocks, and Google led by ChatGPT.Microsoftand related enterprises.
Why are Asia Pacific stocks relevant to them?I think there are many companies in the Asia-Pacific region that have formed highly-linked cooperative relationships with American technology companies.
In other words, it is because of OpenAI's technology that we haveNvidiaThere is a huge demand for GPUs; because of Nvidia's huge demand for chips, there is a strong demand for exports of Japan's semiconductor integrated circuit special materials.
Therefore, the technology companies in the Asia-Pacific stock market and the US technology companies have formed a chain of cooperation, which makes global investors feel that if they invest in US stocks under cheap money, the risk is too high and the concentration is too high; on the other hand, there are too few investment opportunities in non-tech stocks in the US stock market. Therefore, they found Asia-Pacific stocks, which are also technology stocks, but because they invest in markets in other countries, they are an investment behavior that diversifies risks.
Therefore, I believe that this round of deep adjustment in the Asia-Pacific stock market was led by US technology stocks, which is one of the most important reasons.
On the other hand, the current monetary easing and liquidity flooding in major economies, but the fundamentals of the global economy are still relatively weak, especially the hidden danger of overvaluation of Asia-Pacific stocks is more prominent. Any negative news about the market may trigger a sharp adjustment in stock prices. For example, the recent delay in the disclosure of financial information by Nvidia will be interpreted by the market as a decline in the profitability of high-tech companies. Because the US stock market has been rising before, companies have been bringing surprises, financial statement indicators have been improving, new software and new chips have emerged in an endless stream, all of which have brought investors confidence..... Everyone is willing to continue to take over and push up the stock price. But now it suddenly turns out that these leading companies are beginning to face the possibility of a decline in performance, and at the same time, they increasingly feel that the stock price level is getting further and further away from the valuation level supported by fundamentals. The "scene of the bursting of the IT bubble in 2000" seems to have come back again.
Speaking of the IT bubble in 2000, the United States introduced various policies, but none of them allowed it to have a soft landing. Ultimately, the IT bubble collapsed and ended up with a hard landing.
Today, investors feel that they are standing at a bubble high, so everyone is panicking. Maybe Nvidia will have no problems in the end, and it will survive and its performance will be good. But the market has already felt that it is holding a hot potato, and no matter whether the performance is good or bad in the future, it is better to take the money first.
The second reason for the deep adjustment in the Asia-Pacific region is the interest rate hike by the Bank of Japan, which exceeded the expectations of all markets.
It’s not that the interest rate hike itself exceeded expectations, because everyone knew that it would happen one day, but the timing was before the Fed began to adjust its interest rate cuts.
This provided investors, who had been trading at high stock prices, with an opportunity to lock in profits, and short sellers also took advantage of the situation. This resulted in a mass behavior of desperately selling stocks in the Japanese market. Even this "emergency" created by the Bank of Japan also led to a substantial adjustment in Asia-Pacific stocks.
In addition, the adjustment of the U.S. stock market earlier, the combination of these two factors has seriously affected the performance of technology stocks dominated by the semiconductor industry. This is mainly because the United States has a close alliance relationship with Japan, South Korea and Taiwan in the technology industry chain, so the characteristic of rising and falling together is very obvious.
Third, the market overreacted. Because the US stock market and the Asia-Pacific market have experienced the East Asian crisis in 1997 and the collapse of the US IT bubble in 2000, respectively, and the most recent global financial tsunami triggered by the US in 2008 is still fresh in the market's memory, and the market is terrified of the threat.
Investors, including individual investors and small and medium-sized financial institutions, have a "herd effect". They will overreact and run away when they see the market falling. Because these investors have experienced painful lessons from crises in the past, they know that the best way is to lock in profits first and regard cash as king. They will then follow the trend when the market stabilizes. This may result in the market not being a simple adjustment, but the most terrible liquidity crisis.
As for whether it will become a crisis? There is a reference value: see if the daily trading volume shrinks? If the price is only falling, it is just an adjustment, butThe shrinking trading volume means that liquidity problems have emerged and a crisis may be about to break out.
Tencent Finance:Many market participants believe that the direct cause of the Japanese stock market crash is the recent counter-trend interest rate hike by the Bank of Japan and the carry trade against the plummeting yen exchange rate. What do you think of the logical relationship between them?
Sun Lijian:First, carry trade means that Japan's interest rate is very low, and the global market borrows money from Japan, forming a carry trade financing target. After borrowing money, it is necessary to invest in the market with high returns.
There are several prerequisites for carry trade: first, Japan's interest rates must be low, not rising; second, the yen must be at a low level.
If it is a carry trade, where does the money go? It should go to the United States where the interest rate is higher, and you will definitely see the dollar rise and the yen fall. Now the US dollar interest rate may be reduced, the US dollar will depreciate, and the Japanese exchange rate will appreciate again, which is obviously different from the premise.
The recent appreciation of the Japanese yen is entirely due to the decline in the US dollar index, which is a greater factor than the Bank of Japan's interest rate hike.
Obviously, if it is a carry transaction, one side should fall and the other side should rise. Now it seems that the Japanese stock market is falling, but when the Bank of Japan ended the negative interest rate to curb the yen's continuous decline, there was no sign of the yen rising at all. Even the later intervention in the foreign exchange market was not effective. On the contrary, the yen rose after the US dollar fell. Therefore, the decline in the US dollar index led to the rise in the yen, rather than the Bank of Japan's interest rate hike leading to the rise in the yen.
I must correct the market's interpretation of the "yen carry trade" because funds have not yet left the Asia-Pacific market. The fact that the exchange rate in this region is still appreciating is a good proof of this.
You can see that the exchange rates in Asia-Pacific are all rising, but the stock market is adjusting. Because the US stock market is adjusting, the funds have released the money first, but have not converted the money into RMB or US dollars. Now their money is still firmly in their hands. When the adjustment is completed, they will enter the market again.This is why the Japanese stock market fell and the yen appreciated.
To sum up, the first reason for the appreciation of the yen is the decline in the US dollar index; the second reason is that the funds in the Japanese stock market, after being secured, actually remain in Japan's cash market and foreign exchange market.
Therefore, if we must bring it up as a carry trade, the only possibility is that the past carry trade positions have now expired and there may be a capital inflow, but I don't think it's that coincidental.
Sun Lijian:Again, the industrial chain of Asia-Pacific and the industrial chain of the United States are deeply integrated in the technology sector, so if the United States adjusts, the Asia-Pacific market will fluctuate together.
Therefore, as long as the adjustment of the US stock market continues, the Asia-Pacific stock markets will follow suit and there will be no reversal.
But the only thing to be thankful for is that the Asia-Pacific exchange rate is rising, which means that the market has not reached a crisis situation like during the East Asian crisis, when Asia-Pacific stocks fell and Asia-Pacific currencies were sold in favor of US currencies.
Now it is just because the market is adjusting that people are temporarily exiting the stock market for risk aversion, but they may re-enter the stock market in the future.
If this adjustment leads to an overreaction and everyone sells desperately, the originally fine fundamentals may turn into a crisis due to panic. This crisis is a liquidity crisis.
Tencent Finance:Do you think the Bank of Japan will take corresponding measures to rescue the market now?
Sun Lijian:I think the Bank of Japan will remain "indifferent" because their current monetary policy target is not stock prices but commodity prices.
Japan believes that it has already exited deflation, and the next goal is not to go from deflation to inflation. They may continue to raise interest rates in the future, because raising interest rates can reduce imported inflation.
Japan's investment style tends to be safe, firstly because of its aging population, and secondly because it prefers deposits and high-quality bonds for wealth management. They hope that their money can be preserved and that the interest rate returns can outperform the price level.
Tencent Finance:In order to prevent panic from amplifying and causing a continued sharp drop, will the Federal Reserve take relevant intervention measures?
Sun Lijian:From the perspective of the Federal Reserve, it will not take any rescue actions or reverse operations in response to this kind of cyclical adjustment and human behavior of voting with their feet, because this is not a financial crisis.
If the so-called crisis really occurs, the Federal Reserve will definitely reverse its monetary policy. Now it is not a crisis, but an adjustment.
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