There is an old saying on Wall Street called "Sell in May and go away," which is what we often hear as "sell in May."

This year, the global stock market has once again experienced the "May curse" – the global stock market is sluggish, and emerging market stocks and bonds have been sold off by international funds. From the beginning of the year to now, only 6 out of the world's 40 major stock indices are up, the Shanghai Composite Index has plummeted by more than 15% from its highest point at the end of last year, and the US Nasdaq Index has fallen by nearly 30%.

The global stock market has evaporated $20 trillion, and the Federal Reserve has reduced its balance sheet.

This year, the capital market has been sluggish. At the end of 2021, the total market value of the global stock market reached $120 trillion, reaching a peak in recent years. However, from the beginning of this year to now, the total market value of the global stock market has evaporated $20 trillion!

The phenomena of the pandemic, international conflicts, and inflation have all had a negative impact on the global economy. To alleviate high inflation, the Federal Reserve has raised interest rates twice in March and May, with the Federal Reserve increasing the interest rate hike from 25 basis points to 50 basis points in May.

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But this is just the beginning. Along with raising interest rates, the Federal Reserve has also announced a balance sheet reduction plan.

The plan for the Federal Reserve's balance sheet reduction has also been disclosed: starting from June 1, it will initially reduce by $47.5 billion per month, including $30 billion in US Treasury bonds and $17.5 billion in MBS (agency mortgage-backed securities).

It is expected that this plan will be implemented for 3 months, and by then, the scale of the Federal Reserve's balance sheet will be reduced to $950 billion.

Now that June 1st has passed, the Federal Reserve's balance sheet reduction plan has officially started. According to the prediction of Wells Fargo Investment Institution, at this pace, by the end of 2023, the Federal Reserve's balance sheet may be reduced by nearly $1.5 trillion, which may be equivalent to an interest rate hike of 75~100 basis points, and the Federal Reserve's aggressive tightening policy will undoubtedly further intensify the fluctuations in the capital market.

What is balance sheet reduction?At this point, many friends might still not understand what exactly is meant by "quantitative tightening" or how it is done. So let's discuss the logic of quantitative tightening in layman's terms.

Firstly, we need to clarify that the "balance sheet" in quantitative tightening refers to the balance sheet of assets and liabilities. In other words, when the Federal Reserve talks about quantitative tightening, it means it is contracting the balance sheet of the U.S. economy.

Friends who are familiar with accounting know that every business has a balance sheet, with assets on one side and liabilities and owner's equity on the other. The amount of assets you have corresponds to the amount of liabilities + owner's equity you have.

We can apply this to the U.S. economy to explain the action of quantitative tightening.

To start, let's take a simple example - a person takes out a loan to buy a house. Because his real estate has increased, his asset side increases; but at the same time, because he has to bear the mortgage, his liability side also increases. This is a very lifelike process of expanding the balance sheet.

If this person now sells the house, then his assets decrease; after paying off the loan, his liabilities also decrease, which is the process of quantitative tightening.

The Federal Reserve is no different - when the Federal Reserve purchases U.S. Treasury bonds or some corporate bonds (such as MBS), the asset side of the Federal Reserve inevitably increases.

But where does the money to buy these bonds come from? Of course, it depends on the central bank printing money, and the central bank issuing currency is its liability business, which also expands the liability side. This is the process of the Federal Reserve expanding its balance sheet.

Now that the Federal Reserve is tightening again, we can think in reverse. How does the Federal Reserve reduce the asset side? Of course, by selling the bonds it previously purchased, which also means that the Federal Reserve needs to take back the currency it issued and put into circulation at the time, thus reducing the liability side as well. This is the logic of the Federal Reserve's quantitative tightening.

In fact, it is equivalent to taking back the currency that is circulating in the market, further reducing liquidity, in order to curb inflation caused by too much money.The Renminbi Faces Pressure, China Sends Positive Signals

The Federal Reserve's actions will also have a certain impact on the Renminbi — the continuous inversion and potential widening of the China-US interest rate differential.

Due to the Federal Reserve's balance sheet reduction leading to a global influx of funds into the United States, the Renminbi is also under considerable pressure. Therefore, in the short term, there may also be a situation of capital outflow in the Chinese market.

In fact, it is similar to the impact of the previous Federal Reserve rate hikes. By April of this year, foreign investors had reduced their holdings of Renminbi bonds by a cumulative total of 300 billion yuan.

However, according to data from May of this year, the pace of foreign capital outflow from A-shares has significantly slowed down — Northbound capital has shifted from a cumulative net outflow to a net inflow, with a net inflow of 13.865 billion yuan on May 31.

From this, it can also be seen that, in the medium to long term, the recognition of Renminbi assets is still relatively high.

Therefore, major institutions believe that the impact of the Federal Reserve's balance sheet reduction on China is relatively limited. Although the short-term impact on the Renminbi is inevitable, with the stable development of the domestic economy, the situation of capital outflow will not last long.

Against this backdrop, China's top priority is still to ensure the stable development of the domestic economy and to provide support through macroeconomic policies.

Thus, China has sent out positive signals, striving to ensure the steady development of the domestic economy, focusing on the domestic economic cycle, and placing stable growth in a more prominent position. The national economic stability meeting held on May 31 released significant favorable news.

Stability is paramount, what does it stabilize? —— Stabilize the overall Chinese market, stabilize consumer spending for livelihoods, and stabilize the national price level.These coping strategies have played a full stabilizing role in our country's economy, thereby adjusting market sentiment and restoring market expectations. As long as our economic operation is stable, no matter how strong the external winds and waves are, they will not have too much impact on us.

In conclusion:

In addition, many people are worried about the issue of large fluctuations in the RMB exchange rate. In response, major analysis institutions generally believe that there is no need to worry too much. Our country's operating projects still maintain a surplus, and our FDI increased by more than 20% year-on-year in the first four months of this year. All of this injects a "strong stimulant" into the long-term stability of the RMB exchange rate.