Li Xunlei： The risk of a hard landing in the new round of tightening cycle economy in the United States is greater.

Source: China News Network

　　At the beginning of May, the Federal Reserve decided to raise the target interest rate of the federal funds by 0.5 percentage points, and at the same time decided to shrink the table from June. This means that the Fed’s monetary policy has been fully tightened. Tightening the currency usually means a slowdown in economic growth, because interest rates go up and the willingness to invest and consume goes down.

　　The Fed’s new round of interest rate hike-table contraction cycle is different from the situation in the capital market of the US economy in the last round. The risk of hard landing of the US economy in this round is greater, and the stock market bubble is also greater.

　　Judging from historical data,The tightening of the Fed’s currency will have an impact on emerging economies.

　　According to the total GDP, among the top ten countries in the world, only China and India belong to emerging economies, and the other eight countries belong to developed economies with per capita GDP exceeding 30,000 US dollars. Since the end of World War II, the global influence of emerging economies, except China, has not improved significantly on the whole, and the status of other emerging economies has not improved much on the whole except the rise of the four little dragons in Asia.

　　From the structure of global industrial chain, most developed economies are at the high end of the industrial chain, while China is at the low end, while other emerging economies are at the low end. This determines that most emerging economies are at a disadvantage in the global division of labor, and their economies are not only small, but also have not formed their own sound industrial system. Either as a supplier of upstream resources, it is greatly influenced by the global economic cycle; Either it is attached to the industrial chain of western countries and engaged in processing industry, which is highly substitutable.

　　Because these emerging economies have great dependence on developed countries, the relaxation or tightening of US monetary policy will have a great impact on these countries. For example, in the three periods of 1986-1989, 1995-1998 and 2014-2015, the growth rate of countries outside the United States dropped significantly, especially in emerging economies except China, while the economic growth rate of the United States was relatively high and stable.

　　Further analysis, we can find that the three economic weakness of emerging economies occurred when the United States tightened its currency:

　　1986-1989: The target interest rate of American federal funds increased from below 6% in 1986 to over 9.8% in 1989; During this period, the average GDP growth rate of emerging economies excluding China obviously lags behind the global economic growth rate.

　　1995-1998: The target interest rate of American federal funds rose from 3% in 1994 to 5.2% in 1998; During this period, the average GDP growth rate of emerging economies excluding China dropped from 3.07% to 1.2%, while the GDP growth rate of the United States increased.

　　2014-2016: Quantitative easing (QE) in the United States began to withdraw, the target interest rate of federal funds rose from 0.25% to 0.75%, and the US dollar index rose by 27% from the second half of 2014 to 2016; During this period, the average GDP growth rate of emerging economies excluding China is also lower than the global level.

　　So, what impact will this round of Fed’s interest rate hike and table contraction have on emerging economies? This actually depends on the rate hike and the scale of scale reduction. If the scale is reduced to the end of next year, the total scale will be around 1.6 trillion US dollars, which is much larger than the scale of the previous round of scale reduction of 650 billion US dollars. Therefore, emerging economies will face the pressure of foreign capital outflow and local currency depreciation, which will slow down the economic growth.

　　Despite this, there is no sufficient reason to believe that the impact of this round of Fed’s rate hike and contraction on emerging economies will exceed the last round of contraction in 2017-2019. Because by the end of 2021, the inflow of funds from emerging markets was about 570 billion US dollars, less than half of the previous round of QE. Moreover, most emerging market economies have already raised interest rates preventively, so the scale of further capital outflow may be relatively limited.

　　What is the impact of the current Fed rate hike-contraction cycle on the capital markets of emerging economies?

　　Recently, the US stock market and bond market have been obviously affected by the expectation of raising interest rates and shrinking the table, and there has been a significant decline in stock and bond prices. For example, as of May 6, the US Nasdaq index has dropped by 24% from the highest point last year, and the yield of US 10-year Treasury bonds has exceeded 3%.

　　In addition, from the historical data, the rise of mortgage interest rate will increase the cost of housing purchase, curb the demand for purchase, and put pressure on the real estate market. In this round of interest rate hike and table contraction cycle, the Fed will take the initiative to sell its institutional MBS, or further push up the mortgage interest rate. Therefore, house prices in the United States are also expected to fall.

　　For emerging markets, the last round of interest rate hike and table contraction had a great impact on emerging markets, while there was obvious differentiation within developed economies. As the Fed’s interest rate hike-contraction continues, the prices of commodities with higher demand in emerging markets should obviously fall, and the emerging market index will gradually adjust.

　　This round of monetary tightening in the United States, the US dollar index continues to rise, and funds from emerging markets will inevitably flow out. However, due to the quantitative easing period starting in 2020, the growth rate of stock indexes in emerging markets is not as good as that in developed markets. Although the pace of monetary tightening is relatively fast, and the rate hike and contraction almost completely overlap, considering the outflow of funds from emerging markets this year, the stock index has been adjusted back and the risks have been released to some extent.

　　In addition, how strong the US dollar index can go also needs to be questioned. After all, the United States itself also has the risk of economic recession and the bursting of the stock market bubble, which is still different from the situation of the capital market of the US economy in the last round of interest rate increase-contraction cycle, that is, the risk of a hard landing of the US economy is greater and the stock market bubble is also greater. Therefore, if the Fed raises interest rates and shrinks the table less than expected, the currency depreciation of emerging economies is estimated to be limited.

　　In short, my basic judgment is that the impact on the capital markets of emerging economies may be less than that of the last round of monetary tightening cycle, but the impact on the global economic structure and growth model should be paid enough attention, and two major issues need to be observed. First, will high inflation last for a long time? Second, we should observe the phenomenon of differentiation in the process of restructuring the global industrial chain and supply chain, that is, there will also be differentiation among emerging economies, and they will not be prosperous and lose everything. Which emerging economies may rise by taking advantage of the situation? (Author Li Xunlei Zhongtai Securities Chief Economist)