Stephen Jen, CEO of the UK hedge fund Eurizon SLJ Capital and the well-known proponent of the "Dollar Smile Theory," stated that as the US lowers interest rates, Chinese companies may sell off $1 trillion in dollar-denominated assets, which could potentially appreciate the Chinese yuan by 10%.
A few days ago, Federal Reserve Chairman Powell indicated at the Jackson Hole Symposium that the time for the US to lower policy rates has arrived.
This implies that a rate cut by the Fed in September is almost certain, and in Jen's view, this will provide an opportunity for the yuan to appreciate.
Many people are aware of this logic.
As I've mentioned before, a rate cut by the Fed is definitely beneficial for A-share assets because once the dollar forms a depreciation expectation, capital will inevitably flow back to A-shares.
The US stock market faces three major risks: 1.
Bond siphoning: Once interest rates are lowered, it means that US bonds become more valuable (the lower the interest rate, the higher the price of existing bonds), and the bond bull market will siphon liquidity from US stocks.
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Warren Buffett, who holds a large amount of cash, is not really holding cash but may have invested in US bonds.
2.
Dollar depreciation: Once interest rates are lowered, the interest rate differential narrows, and the dollar may depreciate.
If the dollar depreciates, international capital will have to run, otherwise, they will bear exchange losses.
3.
Stock market self-weight: The US stock market has risen so sharply, and frankly, it's all about expectations, driven by valuations.
AI implementation is still a long way off and cannot generate substantial profits, and commercialization is still far from happening.
So, once the dollar rate cut happens, the dollar will definitely flow out.
Where in the world is there such a large space?
I can't think of a reason why A-shares wouldn't rise, even if it's just a rebound, it will rise.
This is the basic logic of capital flow.
However, where does the $1 trillion figure come from?
I'm curious, so I looked it up online.
His reasoning is that since the outbreak of the pandemic, Chinese companies may have accumulated more than $2 trillion in overseas investments, and the interest rates on these assets are higher than those on assets denominated in yuan.
When the Fed lowers interest rates, the attractiveness of dollar assets will be weakened, and it may stimulate the flow back of "conservative" $1 trillion in funds.
He also predicts that if crude oil continues to fall, coupled with an overvalued dollar, the US twin deficits, and the prospect of a soft landing, the Fed will cut rates more aggressively than everyone expects.
As a result, the yuan will appreciate significantly by 5%-10%.
If the People's Bank of China does not intervene in dollar liquidity, then the appreciation of the yuan will be even higher.
He also said that the timing is not necessarily after the Fed's rate cut, but when the dollar accelerates its decline in the so-called soft landing scenario, or when US inflation eases without triggering a recession, it is more likely to happen.
If a situation similar to the yen collapse occurs, there is a risk of the yuan soaring.
However, Beijing has always been wary of a significant appreciation of the yuan, as it would weaken export competitiveness and slow down the already sluggish economic recovery.
Regarding the logic and views he mentioned, I agree, but I have doubts about the numbers he cited.
In fact, other companies have also made estimates, with numbers less than this figure.
Macquarie Group Limited estimates that since 2022, Chinese exporters and multinational companies have accumulated more than $500 billion in assets.
Australia and New Zealand Banking Group Limited believes the figure is $430 billion.
I checked, over the past four years, the trade surplus was 19.12 trillion yuan, and the service deficit was 2.38 trillion, earning a total of 16.7 trillion yuan over four years, which is just over $2 trillion.
However, how much has China's capital flow gone out?
From the first quarter of 2020 to the first quarter of this year, the total net outflow is about $946.8 billion.
During this period, the current account increased by $1.33 trillion, and the foreign exchange reserves are still around $3.2 trillion, without any increase.
In this way, the current account and trade surplus do not match, indicating that there are still several hundred billion dollars that have not been exchanged and have gone out in dollars.
There is also a net outflow of tens of billions of dollars in the capital account, indicating an increase in foreign investment.
In short, from these data, there is no big problem with an increase in funds of $2 trillion, but whether $1 trillion can come back is a question.
How much of it is hot money and how much is long money?
However, even if less than $1 trillion comes back, the improvement in market liquidity is very obvious.
Therefore, from the perspective of liquidity, the depreciation of the dollar is definitely beneficial for A-shares.
Although the fundamentals of A-shares are not very good now, if the US significantly lowers interest rates, there is still hope for A-shares to trigger a rebound driven by the improvement of liquidity.