Between the tightness of the "chief observation", the pain of "stability" exceeding expectations

Economic Observation Network reporter Ouyang Xiaohong

One

The economic data for the fourth quarter that has just been released has drawn an end to China's GDP growth rate of 8.1% in 2021; based on the low base of 2020, 8.1% has not far exceeded expectations, and what "exceeded expectations" is the 5.1% average gdp growth rate in the fourth quarter of 2021, as well as the contribution of net exports in the fourth quarter.

However, on closer examination, it is not difficult to find out how the "pain" of consumption, how to dissolve the pain points, is related to how the economy is stable outside the external circulation. Total retail sales of consumer goods grew by only 1.7% year-on-year in December 2021, the lowest since August 2020; in addition, "total retail sales growth in the past two years has averaged only 3.9%, far lower than the average annual growth rate before the epidemic." At the same time, the average growth rate of residents' income is 6.9%, far lower than the 10.6% growth rate before the epidemic. A senior research expert believes.

The population data released by the National Bureau of Statistics on January 17, 2022: The population growth in 2021 is only 480,000, or close to "zero growth" in the population, which has attracted attention.

"For the first time, the natural growth rate of Chinese mouth fell below 1%! On current trends Chinese may have peaked in 2021. This bodes well for a potential slowdown in the growth rate of China's economic development, which could be faster than previously anticipated, and suggests the urgency of China's future response to an aging population. Zhang Zhiwei, chief economist of Baobin Capital Management, said.

At the same time, not only the economic cycle, but also the global monetary policy is clearly differentiated: the Federal Reserve is tightening, and the Chinese central bank is moderately loose (flexible and moderate). The former is "tight", the latter is "loose", and when the monetary policies of the two major economies are shining their swords, the global financial markets are also responding in their own unique ways, and all major asset classes are in turmoil.

On January 18, the US 10-year Treasury yield, which can be called the anchor of asset pricing, once rushed to 1.88%. On the same day, the three major European stock indexes all fell; the US stocks Dow Jones Index, Nasdaq, and S&P 500 all closed down, closing at 35368.47 (-1.51%), 14506.90 (-2.6%), and 4577.11 (-1.84%), respectively.

On the 19th, the US 10-year Treasury yield stood at 1.9%, the first time since January 2020. Global markets have heard changes and asset prices have fluctuated.

The world, changed by two years of pandemics, has changed – a change in the underlying logic caused by a huge structural force. Under the repeated epidemic + Fed tightening + high inflation expectations + extreme climate risks, including supply chain shocks and many other hard constraints, the global financial market volatility has intensified since the beginning of 2022 and frequent adjustments.

A-shares benefited from the "double reduction" on January 17 (the central bank aimed at strengthening cross-cycle adjustment and increasing liquidity investment reduced the MLF and reverse repo interest rate by 10 basis points respectively), stabilizing and improving. The next day, the Shanghai Composite Index, the Shenzhen Component Index and the ChiNext Index closed at 3569.91 (+0.80%), 14391.39 (+0.19%) and 3144.33 (-0.82%), respectively.

Investors seem to be holding on to the currency, either due to the downward pressure on the economy, or by the shock of the Fed's interest rate hike and the surge in the US 10-year Treasury yield; even though the Chinese central bank's statement on January 18 was quite positive, it was expected that the next day, the three major A-share indexes closed down.

Perhaps, the continuous adjustment of the market also needs to re-examine the bullish and bearish factors, weigh the pros and cons, and after it is confirmed to be good, the trend side will be good?

Two

So, how is the economy working?

On January 17, the National Bureau of Statistics released the economic growth figures for the fourth quarter of 2021, showing that in December, the added value of industries above designated size in the country increased by 4.3% year-on-year, and the expected growth rate was 3.7%. From January to December, the country's fixed asset investment increased by 4.9% year-on-year, and the previous value increased by 5.2%. In December, total retail sales of consumer goods increased by 1.7% year-on-year, expected to increase by 3.9%, and the previous value increased by 3.9%. GDP grew 4% year-on-year in the fourth quarter of 2021, with an expected increase of 3.8% and a growth of 4.9% in the third quarter. Full-year GDP increased by 8.1% year-on-year, with a two-year average growth rate of 5.1%.

In this regard, Zhang Yu, chief macro analyst of Huachuang Securities, analyzed that in terms of consumption, the sharp decline in units above designated size is related to the impact of the epidemic in Shaoxing, Ningbo, Hangzhou and Xi'an in December (Note: Units above designated size refer to wholesale enterprises (units) with annual main business income of 20 million yuan or more, retail enterprises (units) with annual main business income of 5 million yuan and above, accommodation and catering enterprises (units) with 2 million yuan and above); in real estate, investment has declined sharply. In terms of industrial added value: energy supply assurance, automobile replenishment, and production relaxation in high-energy-consuming industries are three marginal positive changes, which may still rise in the first quarter of this year; in terms of investment, the overall is weak, but the new and old kinetic energy is obviously switching. The growth rate of investment in electricity and manufacturing is greater than 10%, and the growth rate of real estate and infrastructure (excluding electricity) is less than 0%.

As for the annual GDP growth rate of 8.1%, Wen Bin, chief researcher of China Minsheng Bank, believes that this has achieved more than 6% of the growth target. GDP grew by an average of 5.1% over two years, gradually returning to pre-pandemic levels. There are three specific points that can be supported:

First, from a structural point of view, consumption, investment and net exports respectively driven economic growth of 5.3, 1.1, 1.7 percentage points, the contribution rate to economic growth of 65.4%, 13.7% and 20.9%, compared with the years before the epidemic, the contribution rate of net exports increased significantly, the contribution rate of consumption rose steadily, the contribution rate of investment fell significantly, mainly due to the strong external demand to drive the mainland exports to maintain a high growth.

Second, from the trend point of view, the GDP in the four quarters increased by 18.3%, 7.9%, 4.9% and 4% respectively year-on-year, reflecting the increase in downward pressure on the economy. However, on a sequential basis, GDP grew by 0.3%, 1.3%, 0.7% and 1.6% respectively in the four quarters (quarter-adjusted). Among them, the fourth quarter increased by 1.6% month-on-month, the highest in the whole year, or indicating that a series of stable growth policies have been forced forward and have produced certain results.

Third, from the perspective of the main goals of other government work, 12.69 million new jobs were created in cities and towns throughout the year, an increase of 830,000 over the previous year, exceeding the target of 11 million new. The per capita disposable income of residents in the country increased by 8.1% in real terms, an average growth rate of 5.1% in two years, which was basically synchronized with economic growth.

However, the growth rate of consumption is worrying - indicating that the economy is still under pressure and urgently needs to expand domestic demand. This may also be one of the motivations for the "interest rate cut" of the People's Bank of China on January 17, aiming to reduce physical costs and improve expectations; although GDP growth in the fourth quarter of 2021 exceeded market expectations, investment, consumption and other aspects of the december economic data are still weak.

"Trend-wise, consumption grew by only 1.7% in December 2021, significantly less than expected, and is the lowest point since the data were available, except for the outbreak and accelerated spread." The further decline in consumption growth reflects the weak domestic effective demand, and the downward pressure on the economy is still large. Wen Bin said.

He explained that from the main consumption items, in addition to the decline in automobile consumption, there are still more, household appliances and audio-visual equipment consumption fell by 6%, furniture consumption fell by 3.1%, or affected by the decline in real estate. In addition, the recent rebound of the epidemic in individual regions, the country has found cases of infection with the Omiljung strain, the formation of a customized agreement on service consumption and offline consumption, and the catering revenue in December 2021 remained down, down 2.2%.

So, what about the overall consumer market? On January 18, Dong Lihua, director of the Department of Trade and Foreign Economic Statistics of the National Bureau of Statistics, wrote that "the overall consumer market continues to recover, and the consumption structure is optimized and upgraded. He explained that in 2021, the overall market sales will continue to recover, and the optimization and upgrading of the consumption structure will be obvious. In 2022, as the normalization of epidemic prevention and control becomes more accurate and effective, the income level and employment status of residents continue to improve, the policy of promoting consumption is gradually implemented, the consumption upgrading trend is expected to continue, and the scale of the consumer market will continue to expand.

Looking at 2021, there are several unexpected things: such as "China's economic capacity for external circulation is stronger than expected" and "China's economic downward trend is declining quarter by quarter". The spread of scattered epidemics at this time and the new population data that hit a new low in decades are not positive for the market.

At the critical moment when short-term, medium- and long-term issues are intertwined, the eyes are on the People's Bank of China.

"At present, the economy is facing triple pressure, and 'stability' itself is the biggest 'advance'. Before the downward pressure on the economy is fundamentally alleviated, it is necessary to serve stability, and policies that are not conducive to stability are not introduced, and policies conducive to stability are introduced more, so as to promote stability with progress. At a press conference held by the State Council Information Office on January 18, Liu Guoqiang, deputy governor of the People's Bank of China, said.

He explained that the current focus is to stabilize, and the requirement of the policy is to exert force. How to make a force? From three aspects: first, make sufficient efforts, open the monetary policy toolbox a little bigger, maintain the total amount of stability, and avoid credit collapse; the second is to make precise efforts, to make the vast and subtle, the financial sector must not only welcome customers to the door, but also take the initiative to attack, in accordance with the requirements of the new development concept, take the initiative to find good projects, do effective additions, optimize the economic structure; the third is to rely on the front.

Liu Guoqiang said that although it is the beginning of the year, the time of the year is very short, and the plan of the year lies in the spring, so we must pay close attention to doing things, forward-looking operations, walk in front of the market curve, respond to the general concerns of the market in a timely manner, cannot be delayed, dragged on for a long time, the market concerns are disappointed, if they are disappointed, they will not be concerned, if they are not concerned, they will be "more mournful than dead", and the things behind will be difficult to handle, so we cannot delay, we must walk in front, and respond to the general concerns of the market in a timely manner.

What is the general concern of the market? What is the economic situation? In what cycle? Is liquidity tight? On the reverse side of tight liquidity is that wide money does not equal wide credit.

Unexpectedly, on January 19, the three major A-share indexes collectively closed down, with the Shanghai Composite Index, the Shenzhen Component Index and the ChiNext Index closing at 3558.18 (-0.33%), 14207.19 (-1.28%), and 3075.98 (-2.17%), respectively.

"This is actually quite normal, because there is no basis for the market to improve at the moment." A senior private equity source said he believes there are five reasons for the adjustment, especially the decline of the ChiNext board:

A, January 17 (Monday) open market interest rate cuts and the central bank's deputy governor's statement that "the toolbox can be opened wider" confirmed the downward pressure on the economy, at the same time, "there is still room for RRR cuts, but the space has become smaller", narrowing the operating space of the market's expected policies.

B, the US 10 bond rose nearly 1.9%, it is likely to break through 2% in the short term, and the risk-free interest rate rose. It has begun to drive up interest rates on U.S. bond issuance. This will not only drive up global capital prices, but also inhibit the downside of China's bond interest rates.

C, the rise in risk-free interest rates led to a sharp decline in US stocks, forming a drag on A shares.

D, on the technical trend, the A-share adjustment itself is not over.

E, China and the United States are not expected to be good, will drive foreign investment to sell, both to lock in gains, stop losses, and some institutions to withdraw funds to make up for the demand for US stocks.

"Logically, it is impossible for global capital prices to rise at this time, and China's interest rates can fall sharply." The senior private equity source said that although the market consensus is that the monetary policies of China and the United States have diverged, because in general, the global market still resonates with the same frequency.

Three

Liu Guoqiang expressed his belief that "after a few months, 'economic downward pressure' will become 'yesterday's story'" because all parties are making efforts.

This still takes time to verify. Will the economic cycle evolve from "stagflation-like" to "weak recession", and the space for interest rate cuts has been opened? In the view of Gao Ruidong, an analyst at Everbright Securities, if you put together the mainland output gap and policy interest rate changes since 2001, it can be found that when real output is below the potential output level for a long time, it is often accompanied by interest rate cuts, and vice versa. Meanwhile, the first rate cut in this cycle occurred in the fourth quarter of 2019, the third quarter when real output fell below potential output, followed by two consecutive cuts in policy rates.

So, since the second quarter of 2021, with the gradual increase in downward pressure on economic growth, why has the policy interest rate not been lowered? According to Gao Ruidong's analysis, at this time, if we introduce the inflation level on the basis of the output level, we will find that in the second quarter of 2021, while the output level is lower, the inflation level is rising rapidly, that is, the mainland has entered a state of "stagflation-like inflation", which has a significant constraint on the monetary policy with the primary goal of controlling inflation, which is also an important reason why the central bank did not see the introduction of aggregate monetary policy before December after the comprehensive reduction of the central bank in July 2021.

However, "in the fourth quarter of 2021, the monetary policy in the dilemma ushered in a turning point, industrial product inflation began to show a peaking and falling trend, but the downward pressure on the output level did not ease, and the economic cycle began to evolve from 'stagflation- to 'weak recession'." Gao Ruidong believes that in this context, the Central Bank of China announced the RRR cut in December 2021, and the space for aggregate monetary policy was opened again, this time, the need for interest rate cuts to be put on the agenda has increased significantly.

On January 17, the central bank lowered the "two rates"; in this regard, Sun Guofeng, director of the Monetary Policy Department of the central bank, said at the press conference on the 18th that the interest rates of the money market and the bond market have also declined accordingly, and the LPR quotation bank will comprehensively consider its own capital cost, risk premium and market supply and demand and other factors when quoting, LPR will fully reflect the changes in market interest rates in a timely manner and guide the downward trend of corporate loan interest rates.

Although to a certain extent, "this interest rate cut is not the other rate cut". Regarding the reduction of the double interest rate, Lu Ting, chief economist of Nomura Securities China, believes that the market impact is relatively limited, and there is less room for interest rate cuts this year. A further 10 basis point rate cuts are expected before mid-2022.

"It wasn't a big surprise." Following the five basis point cut to 3.80% from 3.85% on December 20, 2021, the market generally expects a rate cut in the first quarter, and the lower-than-expected CPI inflation data in December also creates room for lowering the policy rate.

He argues that China's central bank's choice to cut MLF rates now instead of last month is partly to protect the profit margins of commercial banks, as Chinese banks only readjust mortgage rates on January 1 each year, so the 38 trillion yuan of loan rate loans for existing mortgages will not be reset over a full year. Banks have room to adjust the interest rate on real loans. Even without rate cuts, many banks have lowered lending rates, including mortgage rates, due to weak credit demand. A modest rate cut may not be effective in solving the real bottleneck of the economy.

Why is there limited room for additional LPR cuts? Lu Ting analyzed that the benchmark deposit rate of banks has been at a historical low, since the end of 2015, the one-year deposit interest rate is 1.5%; especially the five-year LPR, which will squeeze the net interest margin of commercial banks, putting pressure on the profitability of banks, and bank profitability will be affected by the overall sustained growth slowdown, especially the contraction of the real estate industry.

In addition, "despite a series of easing and corrective measures introduced in the fourth quarter of 2021, there are no clear signs of recovery; some key sectors, such as the housing market, are still deteriorating." Based on comments from some of the leading officials of the People's Bank of China at a press conference on January 18, we concluded that policymakers are concerned about slowing economic growth and that their pain points are nearing their end. Lu Ting said.

The reality is that the central bank is ready to "expand the policy toolbox" and require financial institutions to actively and rapidly expand credit delivery. However, policymakers face many constraints, including oversupply of real estate in local cities and large hidden debts from local governments.

"It is expected that in the coming months it will cut interest rates by another 10 basis points, reduce the RRR by 50 basis points, and significantly increase foreign exchange purchases to increase liquidity and limit the appreciation of the renminbi." China's central bank is expected to inject liquidity through MLF, refinancing, rediscounting, special instruments to reduce carbon emissions and foreign exchange purchases. ”

At this time, the internal and external macro situation is particularly complex and severe, can the injection of liquidity alleviate the pain of "stabilizing" the economy?

Liu Jun, president of the Bank of Communications, wrote that China needs to stabilize expectations through a certain speed of GDP growth targets, fix the anchor of resource allocation, pay close attention to imported inflation and import-type risks, and balance the national economy through the organic combination of cross-cycle policies and counter-cyclical policies, and compress the scissors difference between PPI and CPI is undoubtedly a difficult and urgent task.

Including the Fed's timetable to reduce its bond purchases, it will end in the first quarter of this year, and the timing of interest rate hikes and the number of rate hikes are moving forward and in a bullish direction. With such a wide range, emerging economies have been hit harder and more significantly.

However, "China is already prompting and preparing for this spillover risk, not only the forward-looking management of the compound inflation of supply shortage, demand pull, and cost promotion, but also the effective release and high-quality hedging of the triple pressure of demand contraction, supply shock and expected weakening." Liu Jun thought.

Between the tightening, to soothe the pain of stabilizing the economy beyond expectations, the market response of "mourning is greater than heart death" may also take time.