Go with the flow, and you will be invincible in a hundred battles.

In economics and financial management, it is essential to understand the interest rate cycle we are in, as it is synonymous with the monetary policy cycle, which in turn determines the direction of the economy.

Over the past decade, China's interest rates have undergone significant changes.

Ten years ago, the highest yield on government bonds was 4.6%, and there were plenty of guaranteed financial products with a 5% return.

A decade later, the yield on government bonds has dropped to a minimum of 2.2%, and financial products with a 3% return have become scarce assets.

Especially since 2022, while countries overseas have been aggressively raising interest rates, domestic rates in China have started to decline rapidly, continuously setting new historical lows.

This is not just a short-term cyclical phenomenon but also a long-term structural trend.

In other words, in the long run, China's central interest rate is likely to fall further, driven by three long-term structural changes: 1.

The leverage cycle.

China has entered the later stage of total leverage addition, with the leverage of households, enterprises, and local governments being essentially over-extended, even facing deleveraging pressure, leaving only the central government with significant room to add leverage.

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Overall, the high-speed debt expansion cycle of the past has ended, and the overall demand for debt financing may gradually slow down or even turn downward.

A typical example is that mortgages, which were the main force in household leverage, saw an annual increase of nearly 700 billion yuan at their peak, but only increased by over 200 billion yuan in the last year, even experiencing a rare monthly net decline.

2.

Population aging.

In the long term, population is the most core factor determining economic growth and the central interest rate, without a doubt.

Looking at the current population structure, the population trend for the next few decades is almost a foregone conclusion: the elderly, who are the suppliers of funds and investors, will increase, while the working-age population, especially the young, who are the demanders of funds and producers, will decrease.

This will inevitably lead to the decline of traditional industries such as real estate and a shift in economic growth, thereby driving down interest rates.

Japan's aging rate in the early 1990s was similar to that of China today, with the population over 65 accounting for about 13%.

Over the next thirty years, Japan's aging rate soared from 13% to nearly 30%, and interest rates also fell from around 8% to negative rates (the lowest -0.4%), and China's population trend may be similar to Japan's, with the aging rate accelerating upwards, which will also continue to lower the central interest rate.

3.

Monetary easing.

As long as there is sufficient monetary autonomy, almost any economy cannot avoid using "money printing" to counteract economic downturns, especially during the long-term economic shift process.

On the one hand, it creates conditions for fiscal leverage, allowing government debt to continue to expand at low cost, and private sector debt to roll over at low cost.

On the other hand, it creates time for reform and transformation.

Although leverage cannot solve the problem fundamentally, only by stabilizing the macroeconomic situation with leverage can more time be won for reform and transformation.

Historically, monetary easing is almost an irresistible temptation for every country.

Since the collapse of the Bretton Woods system, which was a gold standard + US dollar standard, central banks of all countries have basically been in a state of long-term easing, with only the degree of easing being different.

Of course, there are exceptions, but most are not unwilling but unable to do so, such as the "PIIGS" that have been deprived of monetary sovereignty.

The countries that had a crisis like Greece definitely hoped to print money and devalue, but Germany, France, and other core countries of the eurozone did not allow it.

The reason for the outbreak of the European debt crisis was that the heavily indebted countries could not use money printing and devaluation to stimulate the economy.

If Greece could print money itself, the problem would have been solved long ago.

There is nothing new under the sun.

If we want to know the future trend of China's interest rates, it is necessary to study the global interest rate history, because the interest rate story that has happened in the main economies of the world over the past few decades is likely to be repeated in China.

Of course, history will never repeat itself completely, but the main plot of the story may be surprisingly similar.

The story of global interest rates should start from 50 years ago: in the 1970s, the Bretton Woods system collapsed, and the global monetary system where currencies were pegged to the US dollar and the US dollar was pegged to gold no longer existed.

This means that the issuance of global currency no longer needs to be backed by an equivalent amount of gold and US dollars, and monetary easing has completely broken free from the shackles of the gold standard.

Since then, the central banks of the main countries in the world have without exception adopted a long-term easing monetary policy.

The logic is simple, although money printing cannot solve the fundamental problems of the economy, it is indeed the most direct and easiest way to drive economic growth.

Once the shackles of the "currency anchor" are gone, almost no country can resist the temptation of monetary easing.

Of course, monetary easing does not necessarily mean that interest rates will fall.

At the beginning of the global currency easing, interest rates not only did not fall but accelerated sharply, and the core reason was not monetary easing, but monetary easing encountered a rare supply contraction, that is, the huge impact of the two oil crises, which blew up the inflation level to the sky.

Take the United States as an example, in the 1970s, the core CPI in the United States soared from less than 3% to more than 13%, and interest rates also soared.

The yield on one-year US Treasury bonds soared from less than 4% to a maximum of 16.5%, and the yield on 10-year Treasury bonds also soared from around 6% to more than 15%.

However, this trend did not last long.

With the ebb of the two oil crises and supply shocks, global inflation and interest rates gradually peaked and fell, opening a major cycle of declining interest rates that lasted for nearly 40 years.

There are two core factors driving the decline in interest rates: on the one hand, the continuous easing of money supply, when the temptation of money printing lost the constraint of the physical anchor, the loose monetarism began to prevail globally, especially after the two major crises of the 2008 financial crisis and the 2020 epidemic, which completely got out of control, and quantitative easing (QE) prevailed; on the other hand, the continuous downturn in money demand, developed countries in the world generally fell into population aging, and the economic growth rate continued to shift gears, and the demand for financing was insufficient.

Driven by these two forces, once the inflation impact caused by supply contraction passed, interest rates would naturally continue to decline.

Take the United States as an example, the interest rate on 10-year US Treasury bonds averaged as high as 10.6% in the 1980s, fell to 6.7% in the 1990s, and fell to 4.5% in the first decade of the 21st century.

After the 2008 global financial crisis, with the further escalation of monetary easing (QE + zero interest rates), interest rates accelerated downward, and before the 2020 epidemic, they had already fallen below 2%.

With the new round of large-scale money printing after the epidemic, the interest rate on 10-year US Treasury bonds once fell below 1%, and interest rates were pressed to the "near-zero" floor.

Not only the United States, but also the interest rates of the main economies in the world have taken a similar trend, and European countries have even created "negative interest rates".

For example, from the 1980s to the 40 years before the 2020 epidemic, the yield on 10-year French government bonds fell from more than 10% to the lowest -0.4%, Germany fell to the lowest -0.6%, and the United Kingdom fell to 0.2%, which is basically close to zero interest rates.

But all this has reversed after the epidemic.

After the interest rate hit the "near-zero interest rate" wall, it suddenly turned around and started a cycle of rising interest rates that has not been seen for decades.

Taking the 2022 Fed rate hike as a sign, the interest rates of the main economies in the world have all reversed and risen.

In just two years, the interest rates of various countries have basically recouped the interest rate decline of the past 20 years.

For example, the yield on 10-year US Treasury bonds has risen sharply from below 1% to above 4.5%, and the main European countries are also the same.

So what is the reason for the reversal of global interest rates?

On the surface, the direct reason is the monetary tightening cycle.

As the global monetary master switch, the Fed has raised interest rates by 525 basis points in just over a year, which is the most aggressive interest rate hike cycle in history.

Other major central banks are almost the same, such as the European Central Bank raising interest rates by 450 basis points to a historical high, the Bank of England raising interest rates by 515 basis points, close to the historical high, and the Bank of Japan also ended the "negative interest rate" policy that has been in place for many years this year.

The main reason for this round of interest rate hikes is the abnormal rise in global inflation after 2021.

For example, the core CPI in the United States has been basically below 2% for the past 20 years, but after 2021, it soared all the way, reaching a maximum of 6.6%, and the core PCE year-on-year also exceeded 5%, almost reaching the highest level since the great stagflation in the 1970s, and the situation in other major economies is similar.

But here is a question: why did inflation suddenly jump up after 2021, when it had no reaction for 40 years of money printing, and even had deflationary pressure for most of the time?

The reason lies in two great changes that have not been seen in 40 years: one is the unprecedented strength of stimulating the economy in 40 years.

The impact of the 2020 epidemic on the economy and the market was huge, and the short-term pressure and panic even exceeded the 2008 financial crisis, forcing countries to stimulate the economy vigorously.

On the one hand, there was a large-scale money printing, for example, the Fed's balance sheet was only 4 trillion US dollars before the epidemic, and it expanded to a maximum of 9 trillion US dollars after the epidemic, and the European Central Bank's balance sheet also expanded from less than 5 trillion euros to more than 8.8 trillion euros, and this kind of doubling "central bank balance sheet expansion" is extremely rare in history.

Some people joked that half of the money was printed after the epidemic, which is not an exaggeration; on the other hand, there was a large fiscal stimulus, and it was not enough to just print money, it was necessary for someone to spend the money, which depends on the government to take on debt and add leverage, and countries basically did this.

For example, the fiscal expenditure in the United States in 2020 directly expanded from the previous year's 4.5 trillion US dollars to 6.6 trillion US dollars, an increase of nearly 50%, a historical high, compared with only an expansion of about 18% after the 2009 financial crisis.Here is the translation of the provided text into English: Secondly, the pandemic has led to a supply shock unprecedented in 40 years.

Over the past four decades, inflation has been firmly suppressed globally.

On one hand, this is due to the golden age of global trade, especially the reshaping of the global supply chain brought about by China's accession to the WTO, which has made the supply of goods in the global economy very stable.

Under normal globalization conditions, it is hard to imagine a shortage of goods, and naturally, high inflation is difficult to occur; on the other hand, it is due to the global energy revolution, with the United States leading the shale gas revolution and China leading the new energy revolution, which has significantly weakened the influence of oil-exporting countries on the global supply chain, making it difficult to cause global inflation due to oil crises.

Therefore, under normal conditions, no matter how much money is printed, global inflation will not face significant upward pressure, and there is even deflationary pressure most of the time.

However, in recent years, especially after the pandemic, these two pillars of inflation have been noticeably shaken.

On one hand, the rise of trade protectionism has reversed globalization, especially the United States' imposition of tariffs on China, which has led to a significant increase in supply chain costs; on the other hand, during the pandemic, supply chain bottlenecks have emerged, with production and transportation costs soaring, exerting great cost pressure on inflation.

Although the pandemic bottlenecks were gradually resolved later, due to price stickiness and the ratchet effect, many prices, especially service prices, remained high, exacerbating inflationary pressure.

Under these two decades-unseen changes of strong demand stimulus and significant supply shock, global inflation has encountered the most severe inflation since the "Great Stagflation" of the last century, and it has not been completely resolved to this day.

Speaking of which, the story of global interest rates over the past 50 years is basically clear, with two core stages: the first stage is the continuous decline of interest rates.

Once the economy starts to shift gears driven by population, and the leverage cycle turns, it is difficult to reverse the trend of declining interest rates: on one hand, there is insufficient endogenous demand in the economy, and on the other hand, insufficient demand will inevitably force monetary easing, with more and more money and less and less demand, interest rates will naturally decline.

Of course, there will be periodic interest rate rebounds in the downward cycle, as the economy will also have short-term cyclical fluctuations, but in the long run, the interest rate center is constantly moving down.

If there are no unexpected situations in the middle, interest rates may inevitably hit the "zero interest rate" or "near-zero interest rate" wall.

The second stage is the rebound of interest rates from the bottom.

The process of interest rate decline mentioned earlier is not endless.

After reaching the "zero interest rate" or "near-zero interest rate" freezing point, interest rates may rebound at any time.

There are two triggers for this rebound: one is that the amount of money printing and economic stimulus is too large, especially a sudden flood of money in the short term, leading to short-term overheating of economic demand and rising inflation; the other is that supply shocks like the pandemic lead to a surge in inflation, and money has to be passively tightened, and interest rates will also be pushed up accordingly.

After the 2020 pandemic, developed countries such as the United States actually encountered both situations at the same time, with high-intensity money printing and supply shocks from the pandemic occurring simultaneously, which led to the surge in interest rates in recent years.

Looking back at the domestic situation, we actually do not need to predict, because China's interest rates have already entered the first stage.

If we take the yield on 10-year government bonds as the benchmark, our interest rate peak probably appeared in 2014, when the interest rate reached a maximum of 4.6%, and since then, interest rates have entered a large cycle of fluctuating downward.

In the past ten years of several economic cycles, interest rates have risen and fallen, but overall, the center is constantly moving down.

The yield on 10-year government bonds fluctuated in the range of 2.6%-4.6% from 2014 to 2016, and from 2017 to 2020, the fluctuation range moved down to 2.5%-4.0%, and from 2021 to 2024, the fluctuation range further moved down to 2.2%-3.3%.

In the short term, as the economy gradually bottomed out, interest rates may rebound, but in the long term, this downward cycle of interest rates is obviously not over.

As mentioned earlier, what we are currently experiencing is very similar to the "first stage" experienced by the world's major economies over the past few decades.

The three core logics driving interest rates downward are not short-term phenomena, and will continue and even strengthen in the next ten years or even longer, especially the first two logics.

First, the aging population will only get worse and will not reverse.

In the next thirty years, the elderly population will grow rapidly, as the three largest generations of the post-1960s, post-1970s, and post-1980s will gradually enter old age, while the young and birth populations will become fewer and fewer.

It is estimated that the post-2020s will only account for 40-50% of the post-1980s, and the decline in birth rates is difficult to reverse.

Second, the space for leverage will become smaller and smaller until it turns to deleveraging.

With the continuous increase in macro leverage, the space for leverage will only become smaller and smaller.

Now, almost only the central government department has a larger space for leverage (so special treasury bonds have become the main force at present).

When the central leverage is also full, the drag of the leverage cycle on interest rates will be more obvious.

Only the last logic, monetary easing, may change, but the global experience has told us that this requires two triggers: either a major supply shock like the pandemic that causes inflation to soar, or a super stimulus like the one after the pandemic in the United States, which lowers interest rates to zero or even negative interest rates.

The first situation obviously has a small probability.

The situation where supply shocks lead to a surge in inflation cannot be completely ruled out, but the probability of it happening in China is indeed very small.

Because our supply chain is too stable, with the world's most complete industrial production system and strong internal circulation capabilities, we have enough capacity to control inflation.

The second situation is also not visible in the short term.

Under the Chinese economic system and macroeconomic regulation, our economic adjustments are more chronic risk releases, and there are few acute crises, so our monetary and fiscal easing is always gradual, and it is unlikely to flood and go into debt crazily like European and American countries in a short time.

For example, after the pandemic, our central bank's balance sheet expanded by only 23%, and fiscal expenditure increased by only 16%, which is much more cautious than European and American countries.

The more likely situation is that it will gradually ease and continuously upgrade, eventually reaching a super-easy state.

Speaking of which, the end of China's interest rates is gradually clear: as long as there are no special external shocks, under the macro combination of an aging population + economic gear shift + gradual monetary easing, our downward trend in interest rates may continue for many years until the currency reaches the limit of super-ease, and interest rates hit the "zero interest rate" wall.

And after hitting the wall, super-easy monetary stimulus may lead to a period of economic overheating, inflation may rise significantly, and interest rates will also enter the rebounding second stage.

As for the extent of the rebound, it depends on the strength of future monetary easing and fiscal stimulus, the greater the strength, the greater the rebound at that time.

But before that, the long-term trend of interest rates fluctuating downward is almost unstoppable.