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september to november will be a period of high uncertainty and volatility for stock markets around the world. with the first interest rate cut in several years, stock markets around the world are affected by every move of the us political circles and the federal reserve.

for chinese assets, investors are most concerned about the impact of the fed's interest rate cut on a-shares. with the fed's september interest rate cut basically confirmed, the logic of "us interest rate cut is good for a-shares" has also begun to be widely discussed, and there is even a saying that "the interest rate cut will bring back trillions of dollars, which is good for a-shares."

the fed cuts interest rates, foreign capital flows back, incremental funds are injected into a-shares, and the stock market surges. this logic seems to be very smooth and is in line with the good wishes of current a-share investors. after all, the current a-shares are really short of incremental funds, especially incremental funds with high risk preferences. once foreign capital really flows back to a-shares, a surge in the stock market is completely expected, which also perfectly fits the mentality of investors. therefore, this logic is very popular and the logical deduction seems to be fine.

but the reality may not be so optimistic. the story of interest rate cuts leading to "the rise of the east and the fall of the west" has been told countless times in the past few years, but the reality is always the opposite. this article will explain why "there will not be so much capital inflow" and why the impact on the domestic market, whether the stock market or other markets, is not that great.

recently, stephen zhan, the well-known proponent of the "dollar smile theory", said in an interview with bloomberg that chinese companies may have earned a large amount of us dollars in recent years and accumulated them overseas, which were used to purchase high-interest assets such as the us dollar. once the federal reserve begins to cut interest rates, the attractiveness of high-interest us dollar assets in the past will weaken, thereby driving at least us$1 trillion in funds to flow back to china.

it is this logic that has led to the saying that "trillions of dollars are flowing back, which is good for a-shares."

so, first of all, have chinese companies really accumulated huge amounts of foreign exchange overseas?

the fact is that the proportion of foreign exchange earned by domestic enterprises after exports in the past two years has indeed been getting lower and lower, and chinese companies have indeed accumulated considerable assets overseas.in the past two years, the domestic economy has been driven by exports to a large extent. not only have the exports of the original "old three" clothing, furniture, and home appliances increased again, but the exports of the new three "new energy vehicles, lithium batteries, and photovoltaics" have also shined. it is precisely because of this that many trade frictions have been caused. now many countries have begun to impose high import tariffs, or anti-subsidy duties, anti-dumping duties, etc. on domestic products. the surge in exports has allowed domestic companies to earn a large amount of foreign exchange. if it were more than a decade ago, then according to regulatory regulations, companies could not retain these foreign exchange and had to convert them into rmb. however, from january 1, 2011, the foreign exchange earned by companies from exports can be stored overseas without being transferred back to the country. in other words, companies can freely choose how to use this part of the earned foreign exchange (converting it into rmb, or directly investing overseas, or even directly holding us dollars overseas, etc.) according to exchange rate changes and their own needs.

as the rmb exchange rate has continued to fall in recent years, the willingness of export companies to convert their us dollar earnings into rmb has actually decreased. judging from the ratio of the amount of foreign exchange settlement of goods trade to the income from goods trade in the balance of payments, this ratio has indeed been gradually decreasing in recent years. this ratio also means that a large number of export companies have not converted all of their us dollar earnings into rmb, but have kept this part of the funds overseas by holding foreign currencies.

from this chart, we can see that after 2020, this ratio has fluctuated downward, and has declined rapidly since 2022.

the reasons are not complicated. first, the rmb exchange rate has weakened in recent years, and the exchange rate will depreciate when converted into rmb. second, the us dollar has been a high-interest asset in recent years, and the annualized deposit rate of the us dollar has exceeded 5% at one time, which is naturally higher than the rmb. third, companies themselves also have an increasing demand for overseas investment, and it is more convenient to hold us dollars.

driven by these reasons, more and more companies will not choose to exchange the us dollars earned from exports into rmb. as a result, companies have accumulated a large amount of us dollar assets overseas. according to the calculations of institutions, compared with before 2022, the total amount of this part of "unsettled" funds is about 1 trillion us dollars. for example, according to the calculations of cicc, the ratio of the amount of foreign exchange settlement to the amount of exports has dropped by about 10 percentage points from the historical average since 2022. from january 2022 to july 2024, the total amount of this part of "under-settled" funds is about 933.2 billion us dollars.

if the federal reserve cuts interest rates in the future and the rmb enters an appreciation range, then the original logic of "holding us dollars when the rmb weakens" will be reversed. these companies holding a large amount of us dollars may accelerate the settlement of foreign exchange, especially at the end of the year, when they need to convert us dollars into rmb for upstream loans, bank loan repayments, and year-end bonuses for employees, etc., so there will be a return of rmb.

this is one of the most important reasons why the so-called "us$1 trillion will flow back to china". at the same time, it should be mentioned here that different institutions have very different forecasts for this number. for example, macquarie group estimates that this number is more than us$500 billion; anz bank estimates it to be us$430 billion;goldman sachsit is estimated that even if the us dollar assets held by residents are included, the us dollars hoarded by chinese companies and residents from mid-2022 to 2024 will not exceed 600 billion us dollars, and the us dollar assets that can be converted into rmb will naturally be even fewer; wang ju, head of interest rate and exchange rate strategy for greater china at bnp paribas, believes that this figure may be far less than one trillion.

this also shows that the market generally agrees with the return of us dollars, but there are very different opinions on how large the scale will be.

whether there can be a repatriation of us dollars in exchange for rmb depends on the reasons why companies hold us dollars as mentioned above, including exchange gains and losses from the appreciation of the us dollar, higher returns on us dollar assets, and their own investment needs.

first, let's look at the exchange rate. for export companies, the depreciation of the rmb means increased revenue, which is conducive to improving the company's profit level. on the contrary, if the company expects the rmb to appreciate in the future, in order to avoid exchange losses, it will definitely convert the received us dollars into rmb. so will the rmb exchange rate continue to appreciate? this question is more complicated, and this article will not discuss it in detail. here is a statement made by the competent authority:

"on august 9, the central bank released the "china monetary policy implementation report for the second quarter of 2024", which proposed that we should do a good job in monitoring and analyzing cross-border capital flows, adhere to the bottom line thinking, adopt comprehensive measures, stabilize expectations, prevent the formation of unilateral consistent expectations and self-reinforcement, resolutely guard against the risk of exchange rate overshoot, and maintain the basic stability of the rmb exchange rate at a reasonable and balanced level. in the politburo meeting held earlier on july 30, it was also mentioned that "the basic stability of the rmb exchange rate should be maintained at a reasonable and balanced level."

note that what is mentioned here is stability. whether it is appreciation or depreciation, it is actually not what the competent authorities want. after all, if the appreciation is too much, it will have a great suppression on exports, which is absolutely unbearable for the current economy that mainly relies on exports. therefore, once there is excessive appreciation or depreciation, the central bank will use various means to stabilize the exchange rate. therefore, the conclusion is that it may not be realistic to expect how much the exchange rate will appreciate. it is even possible that the exchange rate has reached a level close to equilibrium.

secondly, let’s look at the logic that holding us dollars offers higher returns.this logic also exists in export companies. many companies increase their income by "depositing high-interest deposits in us dollars and borrowing low-interest rmb loans."

taking the 2023 annual report of a listed company as an example, nearly 90% of its monetary funds are us dollar deposits:

on the other side of holding high-interest us dollar deposits, the company's daily operations and working capital are mainly met by medium- and short-term loans in rmb.

through this method of "borrowing rmb loans to maintain operations and production, and depositing high-interest assets in us dollars to obtain income", the company realized interest income of 291 million yuan during the reporting period, a year-on-year increase of 169%. of course, using domestic loans to make up for daily operations also incurred some interest expenses, but overall, the interest income it obtained was far greater than the interest cost it needed to pay.

therefore, it can be seen that the interest rate gap between china and the united states has brought about different foreign exchange settlement and sales options for enterprises. if this interest rate gap gradually narrows or even reverses in the future, then enterprises will obviously have the motivation to reverse transactions and hold rmb.

however, in reality, there will still be a considerable interest rate gap between china and the united states for a considerable period of time. before this interest rate gap disappears completely, there will still be transactions of "borrowing low-interest rmb loans and depositing high-interest us dollars."

finally, based on the overseas investment needs and operating requirements of exporting companies, a large portion of overseas assets will be converted into overseas fixed assets and become part of the company's overseas investment. in the future, the scale of this part of "overseas assets held in china" will become larger and larger.

judging from the scale of domestic enterprises going overseas, the number of chinese direct investment in non-financial overseas enterprises reached 7,913 in 2023, a significant increase of 1,483 from 2022, and the amount of non-financial direct investment abroad reached 130.13 billion yuan, second only to 2016, the last round of going overseas. especially in recent years, with the boom in southeast asia, latin america and other regions, a considerable part of foreign exchange has been converted into local fixed assets, and this money will not come back.

in fact, this situation is very similar to that of japan. many studies have shown that although japan's gdp did not grow much during the so-called "lost 20 years", it "recreated a japan" overseas through the transfer and layout of globalization. this conclusion is controversial, but it is undeniable that overseas assets are indeed an important part of a country's residents' wealth. the current trend of chinese companies going overseas is also a manifestation of this.

therefore, in general, the desire for a trillion-dollar repatriation is good, but it may not be as optimistic as the simple deduction suggests. the repatriation of funds into a-shares is more like an imagination. overly optimistic transactions are full of risks that fall short of expectations.

of course, this does not affect my optimism about the a-share market. the more positive policy statements and the already positive fundamentals are now overwhelmed by pessimism. excessive optimism is a risk, and so is excessive pessimism.

it is difficult to sell when the market is crowded, and it is equally difficult to buy when no one is interested. but this is often the right choice.