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Last week, the global stock market experienced Black Friday, and this week, the global stock market once again ushered in Black Monday. The trigger for the global stock market crash was the weak economic data in the United States and the interest rate hike in Japan.CarrytradeClose the position, which was previously chased by arbitrage fundsUS stocksand Japanese stocks, which were sold off.

Behind the unwinding of carry trades, the market began to narrate a narrative of rising in the East and falling in the West, namely, developed economies led by the United States were heading towards recession, and risk-biased assets were falling; the US dollar was flowing back into Asian markets such as Japan and China.

Correspondingly, the market has observed the recent strengthening of the Japanese yen.RMB exchange rateThe US dollar also saw a long-awaited rapid appreciation, with the RMB exchange rate even falling below 7.2.

How do we understand the global stock market crash caused by the liquidation of this round of carry trades, and what will be the future direction of Chinese assets?

1. Why is there a global stock market crash? Carry trade is the surface, and global recession is the inside.

There are two triggers for the liquidation of carry trades. One is the 4.3% unemployment rate in the United States. Combined with the weak PMI and non-farm payrolls data in the United States, the July unemployment rate affected by the hurricane finally caused the market to worry about the outlook for the U.S. economy. The other trigger was the yen rate hike, which raised liquidity costs and narrowed the carry space, ultimately prompting the liquidation of carry trades.

The sharp drop in US stocks caused by the liquidation of carry trades, while objectively pricing in the expectation of a US recession, is essentially the "backlash" of the previous leverage effect. If the leverage effect brought about by carry trades in the past quickly pushed up US dollar assets, then the "de-leveraging" brought about by the liquidation of carry trades will naturally cause the price of US dollar assets to fall faster.

The main factor for closing carry trades is the expected weakening of US stocks, so the underlying logic of carry trades is to trade the US recession. The US is also the leader of this round of global economic cycle. The US recession has aggravated the market's pessimistic expectations of a global recession, and global risk-biased assets have fallen. The prices of assets priced for recession have skyrocketed, such as the rapid decline in US bond interest rates.

2. Qualitative analysis of this global risk asset turmoil: This is a liquidity shock, not a hard landing of the global economy.

Unless we judge that the world will enter a deep recession, the impact of the unwinding of carry trades on risk-biased assets will be more of a liquidity shock.

Why do we make such a judgment? Because a hard landing often shows signs of recession in the form of a financial crisis. Liquidity disturbance is only the beginning of a series of financial risks. The risk exposure of financial risks is often the break in the debt chain of a specific sector.

We have previously mentioned in "Two Important Issues Behind the 'Rise of the East and Decline of the West'" that the current balance sheet of the U.S. private sector is relatively healthy, the U.S. still has a lot of policy space, and there is no sign of a financial crisis caused by the high leverage of the private sector. Therefore, we cannot currently judge that the United States will experience a hard landing of the economy.

If we judge that the United States has not yet started a hard landing, then the global capital market disturbance caused by the unwinding of carry trades, although it does mark the beginning of a recession overseas, at the same time, this round of wind-biased asset pullback should be characterized as a liquidity shock.

3. After the global market turmoil caused by this round of carry trade, where will Chinese assets go?

When the negative feedback of carry trade liquidation just started, both the Japanese yen and the RMB experienced a wave of rapid appreciation. The market once traded "rising in the east and falling in the west", that is, RMB assets, especially China's domestic demand sector, ushered in pricing opportunities.

However, in fact, it is difficult for A-shares to avoid the downward pressure of global risk-biased assets.The reason why the trading flexibility of "East rises and West falls" is limited is that the scale of carry trade in China is much smaller than that in Japan.A sharesThe impact is limited. The underlying driving force of China's risk-adverse assets does not lie in the marginal changes in liquidity brought about by carry trades, but in the Chinese economy itself.

Unless there is a strong stimulus to domestic demand, we rarely see A-shares perform independently when the US economy is in recession and US stocks are falling. After all, part of China's growth driver lies overseas, namely exports and the manufacturing production investment they leverage.

This judgment also applies to the RMB exchange rate.China's RMB exchange rate has two benchmark anchors, one is domestic demand and the other is exports. And exports often have a more decisive influence on the direction of the RMB exchange rate.We believe that carry trades will have a liquidity shock on global risk-biased assets, and will also cause a short-term appreciation disturbance to the RMB exchange rate.

As for ChinaBonds, now that a recession overseas has begun (but not a hard landing), we can still remain optimistic about the direction of bonds.

Article excerpted from: "The trend of Chinese assets after the global stock market crash - Macro Zhidao (3)"

Issuer: CITIC Construction Investment Securities Co., Ltd.

Author: Zhou Junzhi SAC number: S1440524020001