Introduction: Where did all the money go?
Guide
Last week, the funding situation was affected by factors such as the frozen funds of Everbright Convertible Bonds, which continued the previous structural tension. However, it was different from the previous period. Firstly, when it comes to the era of “fear of money”, the 2013 money shortage was manifested as a tense situation in the overall financial system; Furthermore, the tight funding situation at the end of last year was mainly reflected in the structural difference of abundant liquidity in banking institutions rather than tight liquidity in banking institutions. However, this tight funding situation to some extent presents a reversal situation of sufficient liquidity in non banking institutions and relatively tight liquidity in banking institutions. What factors have led to the tight financial situation in different periods, but in different forms? This article first analyzes the financial situation of each period, and then proposes some ideas.
1、 The past of overall tension and the present of structural tension
Firstly, from the perspective of market performance, compared to 2013 and now, the macro performance of the capital market is characterized by extremely tight funding. However, the micro performance of the two is not the same: the weakening of fundamentals in mid-2013 gave investors in the capital market the expectation of monetary easing. Therefore, investors attributed the temporary tight funding situation more to non sustainable factors such as tax payment and temporary reduction of foreign exchange, rather than the tone of monetary policy turning to tightening. However, despite the continuous tight funding situation, the central bank still chose to issue 3-month central bank notes with a scale of 2 billion yuan (unlike the current method of capital injection, the previous model of the central bank relying on passive growth of foreign exchange reserves for capital injection mainly relied on issuing central bank notes for active control of liquidity). Therefore, this operation completely changes the capital market’s expectations of the funding aspect, With the emergence of a ‘money shortage’, the interest rate on funds suddenly rose, and both banks and non bank institutions were severely lacking in liquidity; However, since the middle of last year, although the central bank has locked in the short and extended the long by extending the reverse repurchase period and increasing the open market operation interest rates such as reverse repurchase, and raised the interest rate center, and proposed a prudent and neutral monetary policy tone, the central bank’s proposals are more inclined towards price regulation rather than quantity regulation, and have not significantly tightened the overall supply of funds. Therefore, the capital market is more showing a structural tension in the funding situation. Therefore, although both are money shortages, in hindsight, the systemic financial risks that may arise from high leverage in the capital market have led to a shift in the central bank’s monetary policy. However, what is presented is a different tense situation in terms of funds. Perhaps it is the central bank’s recognition of the excessive market destruction caused by the contraction of quantity that has only treated the symptoms rather than the root cause, and has turned to the rise of prices to remove financial leverage.
Furthermore, from the perspective of technical indicators, this article selects the difference between the interbank lending rate and the interbank collateralized repo rate (the specific theoretical basis is explained below) to analyze the funding situation at that time and today. At the same time, two maturities of 1 day and 7 days, namely IBO001-R001 and IBO007-R007, are selected. From the figure below, it can be seen that the indicators in 2013 and now show different situations: in 2013, IBO001-R001 and IBO007-R007 showed a trend greater than zero, while now IBO001-R001 and IBO007-R007 show a trend less than zero.
Finally, from a theoretical perspective, referring to the LIBOR-OIS index as an indicator of financial constraints, this index reached its peak during the 2008 economic crisis when market liquidity was almost depleted and demand far exceeded supply, causing the index to pulse. The reason why this indicator serves as a liquidity indicator is that LIBOR is the interest rate for interbank lending funds in London, while OIS is the representative interest rate for the federal funds rate. Due to the credit risk of borrowing counterparties relative to OIS, LIBOR is generally higher than OIS; The difference between these benchmark interest rates is generally not very significant, and only when liquidity is greatly impacted will the difference between LIBOR and OIS rapidly increase, because at this time, the credit risk of the borrowing counterparty will be fully exposed. Even if the counterparty is a part of the LIBOR indicator, it is also because there is no excess or lack of funds for the borrowing at this time, which makes the borrowing cost suddenly high. And the selection of indicators in this article is based on this: due to interbank lending rates similar to LIBOR, there is counterparty credit risk in borrowing, while pledged repo rates involve collateral, so the credit risk is relatively low; When liquidity is normal, both indicators can serve as benchmark interest rates, so there is generally no significant difference. When facing a significant impact on liquidity, on the one hand, due to the credit risk of borrowing from counterparties, and on the other hand, the participants in interbank lending rates are mostly banking institutions. When they themselves do not have excess liquidity or are equally lacking in liquidity, the lending rate will quickly rise. Due to these two reasons, IBO001-R001 and IBO007-R007 will quickly rise when the overall market is extremely lacking in liquidity, forming a pulse effect, especially for overnight indicators. However, the current situation is different. The central bank has not tightened the supply of funds, but has demonstrated a stable and neutral monetary policy through price increases, which reflects the structural tension of funds between banks and non bank institutions. That is, the interbank lending rate is relatively lower than the collateralized repo rate, resulting in a downward trend in IBO001-R001 and IBO007-R007.
2、 The difference in current structural tension
The stable and neutral monetary policy of the central bank has brought about a situation of structural tension in the funding side: at the end of last year, due to various factors such as the rise in interest rates and the impact of the national maritime incident, non bank institutions found it difficult to obtain liquidity support from banking institutions, resulting in an extreme lack of liquidity for non bank institutions. As the deleveraging process deepens, the increase in debt side volatility makes the previous asset liability spread arbitrage model unsustainable. The capital market gradually recognizes the importance of debt side management, and the phenomenon of some institutions even profiting from borrowing funds has accelerated the deleveraging process of various institutions in the capital market; For different leveraged entities, their deleveraging speed varies depending on factors such as their system and timing of entry. The recent tight financial situation caused by factors such as the freezing of a large amount of funds in Everbright convertible bonds is quite significant; From the table below, it can be seen that non bank institutions such as funds have relatively sufficient liquidity due to the effective implementation of deleveraging policies, which allows them to profit by lending funds at high prices. However, bank institutions are relatively short of liquidity (even considering the end of season MPA assessment issues faced by bank institutions, funds are relatively tight, but joint-stock banks and urban commercial and rural commercial banks issue a large number of high-level interbank certificates of deposit to continue the capital chain to prevent asset side floating losses, which indirectly indicates that their deleveraging process is slow). Therefore, non bank institutions have a relatively fast deleveraging speed compared to bank institutions, which may be one of the reasons for the phenomenon of structural tension subject switching. For both banks and non bank institutions whose liquidity comes from the central bank, the current phenomenon of structural tension switching between each other is quite desolate, as if they were born from the same root and were too eager to fight each other.
3、 Think about it
From various factors such as fundamentals, there is no support for the shift of monetary policy in each period. However, due to the potential systemic financial risks of high leverage, the central bank tends to tighten its monetary policy: in 2013, it reduced non-standard leverage through volume contraction, while now it mainly reduces leverage in the bond market and real economy through price increase. Both methods make the leverage spread arbitrage model based on the central bank’s sufficient low interest rate liquidity supply unsustainable, triggering periodic stampede events and leading to money shortages; However, there are differences between the two methods. In the passive investment mode that relies on foreign exchange deposits in the early stage, the central bank has weaker control over the supply and price of funds, especially the price of funds; Under the active investment mode of open market operation, the central bank has strong control over the supply and price of funds, using relatively stable supply and gradually rising prices to reduce financial leverage, which is gentle yet powerful. Therefore, looking ahead to the second quarter, in the environment of internal and external leverage constraints and gradually clear asset trends, it is important to do a good job in debt side liquidity management, but it is even more important to do a good job in debt side cost management, because interest margin arbitrage is the most fundamental profit model of capital.