Introduction

As the clock struck midnight on September 19, 2024, Beijing time, investors around the world were keenly awaiting news from the eagerly anticipated Federal Reserve meeting, and the results have finally emergedThe Federal Reserve has officially announced the conclusion of its interest rate hike cycle, which has been in operation since January 2022. The target range for the federal funds rate has been lowered from 5.25%-5.5% to 4.75%-5%, marking a 50 basis point reduction and heralding the start of a new phase of monetary easing for the dollar.

This pivotal announcement signifies a crucial shift in the global financial landscape, as the retraction of dollar liquidity back to its homeland will be curtailed, redirecting capital flows toward overseas marketsFor the global economy, this is undoubtedly a positive developmentThe anxiety that has weighed heavily on investors within major capital markets worldwide may now be alleviatedA rising tide is expected to lift stocks, bonds, and currencies on a global scale.

Examining the rationale behind the Federal Reserve's decision to initiate interest rate cuts, several factors stand outFirstly, the core inflation rate had hit the targeted 2%, while non-farm employment figures have experienced a downward trendThis foreboding economic climate triggered the application of the Taylor rule, prompting the Fed to act decisively to stave off recession risksSecondly, the past two years of interest rate hikes led to real market rates reaching historical peaks, thus depleting liquidity benefits for both households and businesses, necessitating a reduction in overall interest levels.

Furthermore, signs of excessive speculation have begun to surface within U.S. equity markets, which largely comprise the three major indicesThe Federal Reserve recognizes the necessity to reduce rates to transfer potential bubble risks away from domestic markets

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Lastly, the emergence of a new technological paradigm shift mandates that the fruits of innovation be extended and capitalized upon, thus requiring a conducive environment characterized by lower interest ratesThese shifts aim to facilitate global liquidity and spur market applications.

In my recent analyses, I have meticulously discussed the potential negative repercussions that a reduction in U.S. interest rates could impose on ChinaIn summary, three primary concerns arise: the potential for easier access to Chinese industries that are expanding overseas; the continued suppression of the value of domestic assets within China; and a persistent reduction in China's interest rates, which might threaten currency stability.

However, it is essential to explore a contrasting perspective: the potential advantages of lowering dollar interest rates for China's economic recoveryThe complexities of China's economic landscape, marked by over-leveraging, administrative interferences, and wastage driven by debt-fueled investments, have largely contributed to current economic woesEnterprises across various sectors are grappling with cash flow challenges, leading to situations where expenses outpace income, exacerbating the national debt spiral.

Diving deeper into the macroeconomic conditions, persistently subdued investment and consumption are stifling domestic demandThis deficit has significant ripple effects on capital markets, notably real estate and equities, causing notable devaluation of assets and overproductionThe endemic debt deflation spirals further entrap various societal sectors, making escape increasingly difficult.

China's unique national conditions play an important role in its economic vibrancyState-owned banks, policy banks, and other state-controlled enterprises are pivotal economic players, serving as litmus tests for governmental policiesHistorical examples reveal how directives in recent years, such as the urgency to liquidate real estate assets and the tightening measures on developer financing, collectively coined the “housing withdrawal order,” have shaped the current landscape.

Since July 2024, a push to redirect liquidity away from the financial sector towards more productive economic avenues has been noted, a movement deemed by some to represent a “withdrawal of capital” from financial markets, signaling a tangible shift in China’s financial framework.

Nonetheless, these moves towards a “de-financialization” approach may not enhance China's economic health as intended

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Three critical concerns emerge: firstly, the heavy dependency on financial investment within administrative and ordinary sectors renders a rapid shift towards de-financialization potentially perilous, thereby heightening systemic riskSecondly, the advancement of high-tech manufacturing requires a stable financial sector to lend value to its assets, otherwise relegating it to low-value manufacturing, a scenario detrimental to economic upgrade aspirationsLastly, the absence of any systemic reforms alongside de-financialization may incapacitate local financial institutions, yielding adverse effects on national currency strategies and limiting their capabilities for overseas expansion.

In the face of these economic challenges, a pivotal question arises: how can China emerge from this deflationary crisis and achieve a sustained macroeconomic recovery? The answer lies in leveraging the recent reduction in U.S. dollar interest rates as an avenue for actionBy accumulating U.S. treasury bonds and similar dollar-denominated assets, China can attract unconverted overseas funds back into its economy.

Once these funds are redirected into productive sectors of the economy, they could potentially stimulate demand, thereby raising general price levelsAdditionally, issuing special government bonds in the latter half of the year would aid in generating substantial liquidity, converting it into cash transfers to boost consumer purchasing power or assisting existing borrowers in repaying mortgages, thereby strengthening their balance sheets.

The effective circulation of previously inflated broad money supply (M2) can be matched against the narrower measure of money in circulation (M1), thus reducing discrepancies between the twoThis approach resembles a systematic opening of floodgates, allowing pent-up liquidity within the financial system to mobilize, thereby unleashing a multiplier effect on credit creation.

The benefits of this strategy are notable; it is designed to avoid exacerbating wealth disparities and operates beyond a simple wealth redistribution paradigm

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This stems from the current state of asset value depletion facing various sectors, with real estate assets witnessing declines of up to 30% from peak values, and Chinese stocks losing nearly 80% of their value since 2019.

In directing cash distributions to amplify inflation, although this might compromise the savings of wealthier individuals more susceptible to currency depreciation, their asset yields would concurrently increaseConversely, lower-income households would find their financial balances favorable in the short term, rendering the impact non-detrimental.

In summary, China must capitalize on this recent Fed-inspired opportunity to engineer significant inflationary pressures within its economy, thereby revitalizing macroeconomic fundamentals.

How then can the application of cash flow subsidies alleviate the pressing issue of stagnation? To clarify, the core challenge gripping China’s economy currently is inflationary stagnation, which juxtaposes the upward trajectory of inflation rates against increasing unemployment levels.

Once broad inflation is established and escalates to a critical threshold, it becomes feasible to raise interest rates to mitigate inflation, coaxing it back to manageable levelsRising interest rates should stimulate investment and consumption inclination amongst businesses, consequently fostering a more vibrant job market with higher wages as businesses expand production capacities in line with recovering demand.

Under this backdrop, enhancements in employment rates and income levels should gradually restore economic dynamismSimultaneously, rising rates will create a favorable environment for requisite adjustments in inflation, ultimately stabilizing macroeconomic foundations.

Now, we must question why conventional fiscal policies have yet to rectify the inertia within China's economic fundamentalsThe stark realities of local government finances, heavily burdened by declining real estate revenues, and the stagnancy of state-owned capital utilization hinder responsive fiscal measures.

Moreover, with over 100 trillion yuan in newly injected capital within four years, conventional fiscal interventions fail to address inherent inefficiencies within monetary mechanisms, often failing to transition into credit-enhancing multiplier effects.

Understanding the intrinsic complexities of stakeholder interests in China further complicates matters, as wielding change often bears significant challenges.

This proposed approach to leveraging cash flow subsidies to amplify inflation—while resembling Modern Monetary Theory (MMT) principles—aligns with emergency responses characteristic of developed nations

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