Zhao Wei: Under the "policy ebb tide", which industries may come out of the "independent logic"?

Zhongxin Jingwei client, December 2: Title: "Zhao Wei: Under the "policy ebb tide", which industries may come out of the "independent logic"? 》

　　Author Zhao Wei (Chief Economist, Kaiyuan Securities)

　　Multiple factors support the development of China's manufacturing industry

　　From January to October, manufacturing investment fell by 5.3% year-on-year, a decline of 1.2 percentage points narrower than that of January to September. In recent months, the overall improvement and differentiation of manufacturing investment have been obvious; some industries have performed well, or they are mainly supported by many factors such as stable growth policies, external demand boosts, and industrial logic. Since the beginning of the year, fixed asset investment has gradually repaired from a deep decline, and the single-month growth rate of manufacturing investment has returned to positive growth. The investment performance of various industries is obviously differentiated, and some manufacturing industries such as traditional Chinese medicine, ferrous metals, papermaking, agricultural and sideline foods have experienced a higher investment growth rate in recent months than at the end of 2019, showing a high boom. To sum up, it is mainly supported by many factors such as stable growth policies, external demand boosts, and industrial logic.

　　Driven by "steady growth" and its spillover effects, the boom in infrastructure, real estate, automobiles and other chains has rebounded. Since the beginning of the year, large-scale fiscal expansion and monetary easing, as well as the spillover effect of policies, have significantly boosted infrastructure and real estate investment, and the chain of real estate and automobiles has also been pulled. For example, from August to October, investment in ferrous metal manufacturing increased by 48.0% year-on-year, an increase of 29.7 percentage points over the fourth quarter of 2019; investment in the rubber and plastic products industry and automobile manufacturing industry increased by 9.1 and 4.7 percentage points respectively. In addition, the manufacturing industry such as construction machinery and equipment, metal products, and non-metallic mineral products has rebounded.

　　Since the second quarter, the world's major economies have "misplaced" production and demand, and external demand has pulled significantly on some consumer goods manufacturing industries such as textiles, furniture, and entertainment supplies. Under the influence of the epidemic, domestic production has taken the lead in repairing since the second quarter, and overseas production has been continuously suppressed by the epidemic; the "substitution effect" of China's production capacity has significantly driven the consumer goods manufacturing industry with a high proportion of exports. For example, the export value of "other textile products" including epidemic prevention materials once increased by more than 500% year-on-year, and the export delivery value of the pharmaceutical manufacturing industry in the second quarter increased by more than 50% year-on-year. The growth rate of export delivery value of textiles, furniture, entertainment supplies and so on has been higher than that in the second half of 2019.

　　Some industries are catalyzed by their own logic, and the industry boom is obviously boosted under the background of improving demand, such as chemical, paper, agricultural and sideline food and other manufacturing industries. Since the supply-side reform, the expansion of production capacity in chemical, paper and other industries has been strictly constrained by environmental protection policies, and the elimination of small and medium-sized enterprises and backward production capacity has accelerated; in 2019, the fixed asset investment in the papermaking industry fell by more than 10%, and the investment growth rate of the chemical industry also continued to decline in the second half of 2019. At the same time, leading enterprises rely on capital and technical advantages to actively expand and integrate production. Especially in the post-epidemic period, the industry pattern has been further optimized, with rising product prices and improving profits, driving investment to pick up. Under the influence of African swine fever, the agricultural and sideline food industry has also produced similar pattern changes.

　　At the same time, the long-term development direction of some industries and industrial structure transformation is in line with each other, and has maintained a relatively high growth rate in recent years, such as electronics and medicine. The rapid development of a new generation of information technology, and the rapid growth of investment in related services such as 5G communications, have led to the expansion of investment in the hardware facilities manufacturing industry. In recent years, the growth rate of investment in the computer communication and electronic equipment manufacturing industry has always maintained a high level of more than 10%; in the first 10 months of 2020, investment accounted for 9.5% of the total investment in the manufacturing industry, an increase of 4.5 percentage points over 2015. Under the trend of consumption upgrading and aging, the demand for related consumers such as health care continues to expand, forming a continuous support for the pharmaceutical industry. In addition, some high-end chemicals, equipment manufacturing, etc., under the continuous promotion of industrial transformation, have also maintained a high prosperity in recent years.

　　Which industries have come out of the "independent logic"?

　　With the steady growth of the policies gradually into the policy tide period, coupled with the "substitution effect" weakening background, the future of some industries or affected; and some industries may have come out of the "independent logic", the future prosperity of the continuity is worth paying attention to. Comparing and combing the data performance of production, profitability, financing, investment and other data in various industries, some industries may have come out of "independent logic". For example, chemicals, papermaking, etc. in the upstream raw material manufacturing industry, electrical machinery, computer communication and electronics in the midstream equipment manufacturing industry, and medicine in the downstream consumer goods manufacturing industry. In the post-epidemic period, the profits of these industries have improved significantly, and the investment and financing behavior has also shown signs of recovery, and the upward momentum of the industry boom may continue.

　　Among them, industries with transformation logic, such as advanced manufacturing and a new generation of information technology, have been less affected in the process of policy ebb and flow. In 2010, the State Council listed seven industries, such as high-end equipment manufacturing and new generation information technology, as strategic emerging industries as key areas for cultivation and development; since 2016, China has focused on promoting the development of informatization and digital industries; in 2018, Sino-US trade friction intensified, and the outbreak of the epidemic in 2020, further promoting policies to increase support for electronics, communications and other related manufacturing industries. In the process of economic transformation and breakthrough, these industries that are in line with the direction of transformation and development may have sustained development momentum, and the impact will be relatively small in the process of policy ebb and flow.

　　Some manufacturing industries with high dependence on external demand, such as electrical, mechanical, chemical and other industrial products, furniture and other consumer goods, may also benefit from the improvement of external demand in stages. After the outbreak of the epidemic, the United States launched a large-scale fiscal and monetary stimulus measure, and the economy is fully equipped for recovery. Driven by the continuous improvement of demand, the US inventory cycle is about to restart, and new orders in the manufacturing industry have stopped falling and rebounded, accelerating their improvement. In the subdivision of the manufacturing industry, the materials required for production activities such as machinery and equipment (loading and unloading, agriculture, etc.) and electrical equipment (home appliances, lighting, etc.) may have a large space for replenishment. In addition, the inventory of clothing, furniture and other consumer-related goods in the wholesale and retail links is also at a low level. These commodities correspond to China's export industry, and the future boom may be more sustainable. (Zhongxin Jingwei APP)

　　Zhao Wei

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