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since september 18, 2024, the shanghai and shenzhen 300 index has risen by 27%+ in just 9 trading days, with extremely rapid momentum and no signs of slowing down.

for this phenomenon, many investors simply attribute it to the incident in september. surprising politburo meeting , there are still some "short" investors who are still struggling with one thing: "the intensity of central fiscal stimulus". they believe that,if the follow-up fiscal stimulus is not in place, this bull market will not go far. 。

to be honest, people who hold this view are basically half-empty and do not understand either finance or currency.

when thinking about china's fiscal problems, we can't just focus on the fiscal itself. we also need to ask questions from a monetary perspective? ? why is china’s currency so loose? risk assets are performing so poorly?

many people will parrot that monetary policy is like pushing a box with a rope. therefore, currency does not stimulate risk preference, but fiscal policy will stimulate risk preference. however, this group of people could not answer another question. why can the federal reserve stimulate risk appetite, but the people's bank of china cannot?

in fact, the real crux lies in the division of power between the central and local governments. on the issue of currency, the central government has been too decentralized. 。

this story can be traced back to the tax-sharing reform in 1994. in that wave of reforms, fiscal power was centralized from local governments to the central government. in exchange, the central government decentralized monetary power to local governments.

in other words, although the local tax power has been weakened, the financing power has been strengthened, forming a weak taxation, strong financing pattern of capital。

therefore, in the past 30 years, we have seen three major phenomena:

1. stock market financing market, local enterprises continue to raise funds from the stock market;

2. real estate financing market. local governments need to continuously sell land to raise funds. some people call it "land finance", but i think it is more appropriate to call it "property financing market";

3. urban investment platforms. local governments form a large amount of invisible debt through urban investment platforms;

whether it is stocks, land or urban investment bonds, they are all in some form financial products, contains huge financial attributes. they will definitely share the central bank’s say in currency. on top of this structure, we will see various fund pools, such as non-standard, financial management, p2p, etc. these capital pools will seriously drag down the transmission efficiency of interest rates.。

in the article "on the reform of the interest rate transmission mechanism and its impact on the stock market and bond market", we discussed this issue. under our decentralized system, the effect of the central bank's lowering of funding interest rates is uncertain, and may lead to an increase in the prices of risky assets or a decrease in the prices of risky assets.。

as shown in the figure above, when the financial capital pool is very strong, lowering the omo interest rate will have the effect of raising interest rates on risky assets.

as shown in the chart above, a very important reason why the shanghai and shenzhen 300 index continued to decline from june to september is that monetary easing led to financial management siphoning away risky assets. however, the central bank has to be easing. if it does not reduce banks' liability costs, it will not be able to lower existing loan interest rates in the future.

so, why has the interest rate liberalization reform been so slow and the central government has accepted the poor interest rate transmission mechanism for a long time? ? this depends on the stage of development.

in the article it’s time for more changes, we discussed the 75 years since our founding that catch-up economy model。

through frugality, we accumulated a large amount of surplus, part of which was converted into exports, part of it is converted into domestic capital expenditure.。

when domestic capex space is huge, everything is great, the supply curve expands rapidly, driving the demand curve to expand. in other words, although we have suppressed some domestic demand, consumption is also growing very fast, and after all, production is also growing very fast.

as you can see in the image above, at this stage it’s all about scaling up production. with huge room for capital expenditure across the country, it would be beneficial to relax local financing controls. the central government is also willing to delegate powers to local governments on financing issues.。

however, the situation has changed as capex headroom has declined. we're seeing more and more inefficient investments, it has become inevitable to seize power from local governments on financing issues.。

so, what should we do? ? the solution to the problem has moved to the demand side., by expanding domestic demand, we can not only increase consumption and improve residents' sense of gain; we can also promote industrial upgrading and give the supply side the impetus for reform.

in the previous stage, the main direction of the stock market was to become wider and fatter to finance capital expenditures; in the new stage, the main direction of the stock market was to become higher, to increase residents' risk appetite and expand consumption.

in other words, both the financing market and the investment market are satisfying staged development needs 。

in this case, if we use past experience to look at this bull market, we will definitely get the wrong answer. this is because in the past 30 years, our main task was to make large amounts of capital expenditure and expand production capacity; in the next 30 years, our main task is plan internal circulation well to create space for production capacity upgrades 。

if consumption is sluggish, the company's gross profit margin will be reduced, and the company's motivation for upward innovation will be much less.

in other words, we need a certain amount of inflation to create huge room for trial and error for companies. . on the contrary,if the macro environment is poor, the company's gross profit margin is very low, and the space for trial and error is limited. , then, enterprises will only innovate downwards, and various inefficiencies will be involved. after all, survival is the first priority. however, we hope that companies will boldly innovate, and we do not want companies to spend their time cutting corners. therefore, a good domestic demand environment is extremely critical to the implementation of high-quality development.

if we understand the strategic significance of "expanding domestic demand", it will not be difficult to understand financial reforms. we no longer need to continue to relax local financing authority. more financing authority will be returned to the central government. central banks will have more and more power 。

in the past, many people would complain that the central bank could not control the stock market, and the stock market often fell after lowering reserve requirements and interest rates. recently, many people have complained that the central bank's influence on the bond market has declined, the bond market has risen sharply, and the market ignores the central bank's risk warnings and goes its own way. .

however, after this round of reforms, everything will change. after the local financing authority is lifted, the central bank's influence on the stock and bond markets will be sharply enlarged. , it will become more and more like the federal reserve.

on the table, we have observed two significant changes. first, the central bank can conduct stock and treasury bond swaps with institutions to support the stock market; second, the central bank directly buys and sells treasury bonds, affecting the treasury bond market. under the surface, there are three more important changes: first, the stock financing market has changed into an investment market; second, the property market financing market has changed into an investment market; third, urban investment has gradually withdrawn from the stage of history. the capital pools structured on these three major types of financing will also gradually fade away. the transmission efficiency of the central bank’s interest rate policy will be greatly improved 。

to be honest, monetary policy is not as incompetent as some people say. we need to analyze specific issues to see if there are many transmission obstacles in the current interest rate transmission environment.

in the past, there were many obstacles, which was determined by the background of the times. financial decentralization has great benefits; in the future, obstacles will be greatly reduced, and financial centralization will have great benefits.

in fact, the american model is a centralized model , which attributes global financial power to two major carriers, first, the federal reserve; second, the u.s. stock market. otherwise, it is impossible for us to feel the huge influence of the federal reserve and see a long-term bull market in u.s. stocks. in other words,if we can’t understand financial centralization, we can’t understand u.s. stocks at all 。

symmetrically speaking, the rmb in the past was actually in a relatively torn state. each local government had considerable financial authority. this tearing not only brought us huge benefits, but also created a lot of trouble. before this round of financial reform, we are close to where europe was after the creation of the eurozone , differences between regions have created a lot of troubles, and financial decentralization will amplify these troubles.

financial phenomena are always a reflection of institutional arrangements. why were there “3,000 points in ten thousand years” before? because of financial decentralization. why can the shanghai composite index continue to grow in the future and even exceed 10,000 points? because of financial centralization。

currently, we have observed that the stock market exhibits a different movement pattern than in the past—— top down - stock index futures drive 300etf, and 300etf drives constituent stocks.this is actually feedback that the underlying driving force of this bull market comes from financial reform. if we are still desperate for a sword, then it will be easy for us to fail to understand this bull market.

many people are still talking about fiscal stimulus and fundamentals every day, but their view is too partial, too one-sided, and too static.

in addition, institutional changes will also bring changes to the asset management industry. huge challenge in the past, it was good to find alpha because financial power was decentralized to local governments. as an important link, public funds also enjoyed great power, that is, investment managers had great pricing power.

it will be extremely difficult to find alpha in the future, because financial power has been transferred to the central government, and the power of public funds will also be transferred to the central government. the size of passive funds will expand significantly, the size of active funds will shrink significantly, it will no longer matter what investment managers think, and everyone will be reduced to a screen.

finally, don’t be fooled by words like “fiscal” and “currency”. there is only one thing that really matters – “the relationship between the central and local governments”: 1. decentralization; 2. centralization.

there are two levels of relationships behind this, 1. disorder and order; 2. relaxation and tightening under order . in the past few years, we have completed a qualitative change, from disorder to order; for a long time to come, we are about to relax in order.

when the central bank is in line with the federal reserve, a-shares will surely be in line with u.s. stocks; in the future, we will have an extremely powerful central bank and a-shares, which is also the only way for the internationalization of the rmb.