This week has witnessed a tempestuous collapse in the stock, bond, and currency markets, forcing us to confront a far more treacherous situation than we experienced in 2020. The backdrop is an economy straining under immense pressure, raising fundamental questions about the efficacy of macroeconomic policies amidst turbulent waters.

At the crux of this dilemma lies a critical choice: should priority rest on stabilizing the stock market, or ought the focus be on preserving the value of the currency? This is not just an academic debate; it's a vital decision that influences the livelihoods of millions and the broader economic landscape.

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In the midst of current volatility, Chinese investors are rallying to defend the significant 3,000-point barrier in the A-shares market

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After a dismal start to 2022, the A-share market has plummeted, with the CSI 300 index suffering a staggering 20% decline in just four months—marking the most significant drop in thirteen yearsBy last Friday, both the ChiNext index hit annual lows, and the Shanghai Composite Index dipped below 3,100 points, reducing the prices of numerous stocks back to levels not seen in two years.

Market sentiment has substantially deterioratedThough the Shanghai Composite managed a minimal gain on Friday, investor confidence remains fragile, hovering precariously around the 3,000-point thresholdExperts have cautioned that if the index falls beneath this level, it could trigger a liquidity crisis, with severe ramifications for public and private funds alike.

Prominent voices from large public mutual funds are stepping forward, pledging their support for the market

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Their collective effort signifies the urgent mobilization of resources to fend off further declines, marking the start of an all-out defense of the 3,000-point mark.

The 3,000-point line feels reminiscent of a market return point—a cyclical benchmarkIn 2008 and again during the 2015 market crash, this level served as a line in the sand, igniting significant efforts to stabilize the marketNow, seven years later, as the market stands once more on that precipice, there is a palpable tension: can this crucial level hold once again?

The answer rests in the hands of the market participants, who are in turn awaiting a policy responseEconomist Guan Qingyou offers a vivid metaphor: the stock market resembles a drifting vessel lost at sea, where provisions are running low, yet the number of people aboard grows larger by the day

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The clear implication is that the necessary remedy is a continuation of loose monetary policy.

Numerous factors contribute to the current predicament of the A-share market: repeated pandemic waves, the U.SFederal Reserve's interest rate hikes, the ongoing war between Russia and Ukraine, and overall economic strain—all are contributing calamities that threaten to further decimate market valuationsWith each downturn, market players cling to the hope of macroeconomic easing as a lifeline.

In reality, despite official assurances of monetary easing from relevant authorities and leaders, the central bank has remained unmoved, creating a growing dissonance between action and expectationThe market's cries were finally met with a modest 25-basis-point reduction in the reserve requirement ratio, which, at best, can be termed a symbolic gesture in the face of overwhelming challenges.

In the past, every time policy signals were deployed to stabilize market expectations, selling pressure typically receded, giving way to buying; however, the tools to rescue the market were often returned to the proverbial toolbox, replaced by mere slogans and cheering encouragement.

This expectation management has paradoxically rewarded those opting to sell, while punishing steadfast investors, slowly eroding trust until even the most loyal supporters of the market begin to falter.

In summary, the current debacle in the A-share market stems from an acute mismatch between the desperate calls for macroeconomic easing among millions of shareholders and the reality of insufficient measures to deliver real support.

Rescue via liquidity seems like the last viable remedy for the beleaguered A-shares.

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Meanwhile, the Renminbi is resuming its descent, with recent valuations reflecting a turn towards the 6.4 per dollar range

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Marked by continuous declines, the currency has lost over 1,000 basis points in merely a few days, capturing the attention of market observers.

In four consecutive trading days, the offshore Yuan saw a decline, breaching several critical barriers along the way, ultimately registering a nadir of 6.5267 last FridayThe past four sessions alone reflected a depreciation exceeding 2.2%, with the currency hitting its lowest levels since July of the previous year.

The reasons behind the rapid depreciation of the Yuan can be traced back to several interconnected factors: pressures arising from dollar strength, a slowing Chinese economy, and mounting yield differentials spurred by U.Sinterest rate hikesAdditionally, pandemic-related disruptions have exacerbated supply chain tensions, fuelling pessimism regarding export capabilities.

Despite acknowledging these multiple causes for the depreciation, the decisive factor remains the rhythm of rate hikes from the U.S

Federal Reserve, which casts a long shadow over the Yuan's valuation.

As the Fed retrained its focus back to strict monetary tightening amidst persistent inflation, China's macroeconomic policy, in stark contrast, has favored gradual easingThe divergence has led to a perception of vulnerability within the Yuan as traders and global hedge funds interpret the situation as ripe to bet against the Chinese currency.

Notably, a similar dynamic is observable with the Japanese Yen, which has seen its value crumble under pressure as Japan pursues a contrastingly loose monetary policy while tightening counterparts abroad advocate stricter measures.

On the 19th, the Yen similarly succumbed, falling below a threshold of 127 to the dollar—a mark not seen since 2002, effectively placing the currency among the worst performers of the year.

The Yen's decline is emblematic of Japan's struggle as it maintains ultra-loose monetary policies despite tightening trend among global counterparts, leaving investors opting to sell Yen while searching for safer dollars.

Thus, if China's monetary policy continues along the path of easing, the Renminbi's depreciation is likely to persist, possibly accelerating further.

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Caught in the middle are the beleaguered investors of the A-share market and the ever-watchful dollar capital—herein lies an apparent quandary

Should the focus remain on preserving the stock market, or is it prudent to safeguard the currency?

The underlying question may reveal itself to be a false dichotomy; preserving the currency’s value equates to protecting economic health, which in turn fortifies the stock market.

The macroeconomic policy apex has consistently signaled this directionGovernor Yi Gang stressed during the Boao Forum's 2022 annual meeting that the primary goal of China’s monetary policy is to uphold price stability—imperative for ensuring both food security and stable energy supply as anchors for economic steadiness.

A deeper understanding of this stance clarifies why the A-share market is grappling amidst a torrent of uncertainty; the central bank's recent minor adjustment on reserve ratios reflects a reluctance to substantially alter interest rates amidst a backdrop of rigorous dollar appreciation.

In protecting against severe dollar appreciation, stabilizing the currency remains paramount, especially when any rapid devaluation threatens economic inflations via commodity price spikes

To emphasize, the true crisis in the market today boils down to faith—confidence is absent, not funds.

The recent economic indicators have exceeded forecasts, suggesting efforts by the central bank to create liquidity haven't fully translated into the economy due to hesitance from businesses and consumers in expanding investments—demonstrating that valid economic impulses often stall in the face of uncertainty.

Where does this confidence emerge from? The answer lies in stability—most critically, price stability that fosters productive economic activity.

Maintaining the currency’s value directly fortifies stability across the board.

Unlike stock market fluctuations where volatility is commonplace, currency stability represents an essential necessity for a large economy concerning both internal commerce and international trade

When faced with competing internal and external pressures, resolving external issues takes precedence.

Simply put, ensuring that everyone can secure essential resources trumps catering to the excesses of a few.

Hence, the central bank’s choice to prioritize currency stability aligns with this broader vision of price stability as a vital economic toolThe global inflation crisis in 2021 has presented challenges unique to each major economy; however, China's inflation remains distinctively contained, partly evinced through a strategic endeavor to maintain a stable Renminbi to counter the inflationary pressures of energy and commodity surges.

Unexpectedly, the onset of the Ukraine war added another layer of complexity, spiraling into a global energy and food crisis, amplifying existing inflationary strains.

Ultimately, exchange rate fluctuations are a result of market dynamics but can also exacerbate broader economic volatility

Allowing rapid depreciation of the Renminbi could open the gates for substantial inflationary effects on pricing across production areas.

Thus, cushioning the currency from severe depreciation remains a pivotal strategy for maintaining economic equilibrium.

In the economic theory prism, currency appreciation benefits imports but diminishes export competitiveness—a trade-off fraught with intricaciesHowever, in practical terms, market demand shapes the core reasons for export outcomes, rather than mere pricing.

When examining two pivotal pieces of data, China's export success post-Renminbi appreciation provides key insights: the Yuan's value versus the dollar has fortified from approximately 8.3 in 2005 to 6.4 today, alongside China climbing to the foremost position as the world’s largest exporter.

Japan presents a compelling juxtaposition; despite a sharp appreciation post-1985 “Plaza Accord”, which initially dimmed their exports, they eventually saw growth surpass previous highs, indicating that currency volatility does not solely drive export fortunes.

Both cases underline that maintaining currency value amidst wider inflationary currents can indeed be strategically advantageous, fostering wider economic stability and enhanced international competitiveness, which ultimately services the domestic populace.

With this perspective, Governor Yi's clarion call for price stability can be appreciated anew