$1.67T Market Cap Vanishes: US Funds Dry for "China Containment" Amid RMB Rise, Japan's Role

**Preface**

The economic situation in the United States in 2024 is complex and volatile. The actual GDP growth rate for the first quarter was 1.3%, and for the third quarter, it was 3.4%. However, the increase in the fourth quarter was revised down by 0.1% from the "preliminary estimate" of the previous month.

Global stock markets also experienced a sharp decline on August 5th and 6th, with a loss of approximately $1.67 trillion in market value.

At this critical moment, Japan began to reap the benefits from the United States at a speed that was too fast to catch, and the world joined forces to drop trillions of deep-water bombs.

This has led to the shelving of the United States' "containment strategy" towards China, as the U.S. is now facing a shortage of funds, and the Chinese yuan has begun to fight back!

Why would Japan harvest their "big brother" the United States? How has the Chinese yuan fought back?

**Global Stock Market Plunge, $1.67 Trillion in Market Value Vanishes**

Global stock markets experienced a sharp decline on August 5th and 6th this year, with approximately $1.67 trillion in market value evaporating.

On August 6th, the global stock market value shrank significantly, with an estimated loss of about $6.4 trillion, including major markets such as Japan, South Korea, A-shares, as well as Europe and the United States, which lost more than 2 trillion yuan in market value on the same day.The reasons for this significant market downturn can be attributed to multiple factors. Firstly, uncertain events in the global market have triggered a risk-averse sentiment among investors. Additionally, the recent influx of funds into the market primarily came from ETFs, but these funds have experienced a contraction in the short term, leading to a lack of market confidence. Furthermore, Federal Reserve Chairman Jerome Powell has hinted at continuing aggressive interest rate hikes, which has also sparked panic selling in the market. Although there is evidence that global stock markets lost 1.67 trillion yuan in value within a single day, this figure may be underestimated. In reality, depending on different reports and statistical methods, the amount of value that global stock markets have lost during this period could be even higher.

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【Japan Counterattacks the Dollar, Initiating a Rate Hike for the Yen】

Japan can be described as a "wolf that cannot be tamed," as they have engaged in yen carry trade strategies, investing trillions of dollars in "deep-water bomb" operations under high-interest-rate environments for the dollar, forcing traders to close their previously favored "long dollar, short yen" trades. Concurrently, the Bank of Japan has raised interest rates beyond expectations, further impacting the U.S. financial market. On March 19, 2024, the Bank of Japan announced an interest rate hike, ending a 17-year era of negative interest rates, by raising the benchmark rate from -0.1% to a range of 0 to 0.1%, and discontinuing the yield curve control policy. It is precisely because of this rate hike by the Bank of Japan that the yen's exchange rate against the dollar has fallen in the opposite direction, once dropping to 150.46 yen per U.S. dollar, reaching a new low in two weeks.For the Japanese domestic economy, raising interest rates may increase the interest on residents' deposits and asset income, but it will also increase the financial costs for businesses, especially small and medium-sized enterprises (SMEs).

【The U.S. Debt Problem is Gradually Intensifying】

In fact, even if the yen does not raise interest rates, the U.S. debt problem is still intensifying...

As of July 31, 2024, the debt of the U.S. federal government has exceeded $35 trillion, a figure equivalent to each American being in debt by approximately $103,000, and U.S. debt is growing at a rate of about $1 trillion every 100 days.

The U.S. federal government's budget deficit continues to expand, with an expected $1.9 trillion for the fiscal year 2024, which is a 27% increase from previous forecasts.

Many experts believe that the essence of the U.S. debt problem is the "dollar hegemony." The U.S. has long maintained a trade deficit, over-issuing dollars, exporting inflation and asset bubbles globally, and ultimately having the world bear the cost of dollar devaluation.

This not only weakens the future of the U.S. economy but also has a negative impact on the credit systems of many countries, including China.

Due to the significant decline in the depth of the U.S. debt market, the volatility of both stock and bond markets has intensified, and the liquidity pressure index has risen to a 10-year high. Coupled with the cumulative effect of the Federal Reserve's balance sheet reduction, long-term U.S. debt may face greater liquidity shocks than in the past.

The two parties within the United States are also in constant conflict over fiscal issues. If they fail to reach an appropriations bill, the government may once again "shut down." International rating agencies such as Fitch have repeatedly warned of the risk of a downgrade in U.S. credit and have placed the U.S.'s long-term foreign currency issuer default rating on a negative watch list.

Under multiple pressures, the United States is already facing a shortage of funds in implementing the "containment strategy" against China. Both the military and the Department of Commerce are demanding increased budgets, but the financial gap is difficult to fill.In this scenario, the United States may lack sufficient fiscal resources to sustain its policy of containment against China.

【The Yuan Begins to Fight Back】

The non-farm employment data released by the United States on the evening of August 2 fell short of expectations, leading to a retreat in the US dollar and US Treasury bond yields, thereby driving the appreciation of some non-US currencies, including the Chinese Yuan.

On September 11, the People's Bank of China convened a special meeting of the National Foreign Exchange Market Self-Disciplinary Mechanism, emphasizing the maintenance of the basic stability of the Yuan exchange rate and sending a strong signal to guard against the risk of excessive exchange rate fluctuations.

The Federal Reserve is also very likely to stop raising interest rates, which eases the phenomenon of the "inversion" of the China-US interest rate spread, providing support for the Yuan exchange rate.

As a result, both onshore and offshore Yuan exchange rates have seen a significant increase. The news released by the central bank emphasizes the maintenance of the basic stability of the Yuan exchange rate, which may be one of the main reasons for the major counter-offensive of the Yuan exchange rate.

Moreover, starting from November 2023, the Yuan has embarked on a path of rapid appreciation, rising from 7.33 to 7.16, an increase of 2.4% in less than a month.

The appreciation trend of the Yuan exchange rate is the result of the fundamental improvement and the appreciation trend of the Yuan, which not only reflects the strong recovery signal of the Chinese economy but also reflects the governance model combining government and market under the socialist market economy system with Chinese characteristics, which can effectively respond to internal and external challenges and maintain stable economic growth.

【Conclusion】

The financial war between China and the United States has led to Japan becoming the ultimate target of being harvested. The United States has forced Japan to devalue its currency through aggressive interest rate hikes and has taken advantage of this opportunity for capital inflow and asset liquidation.Despite this, China is also actively responding by adjusting its foreign exchange reserves and monetary policy to protect its own interests.

In the current global economic landscape, the significant counterattack of the RMB exchange rate, Japan's financial operations against the United States, and the fiscal difficulties faced by the United States in the process of containing China together form a complex international economic dynamic.

It is precisely because of the interweaving of these factors that they affect the economic policies and market performance of various countries.