The "Government Work Report" put forward that the main expected target for development in 2022 is GDP growth of about 5.5%, slightly higher than the previous market expectation of 5%-5.5%. With the epidemic still continuing, the emergence of black swans of geopolitical conflicts and the rise in commodity prices again, how to achieve this already difficult goal has become the focus of attention of industry insiders. This article believes that the external environment in 2022 may be more severe than the previous two years, real estate from the past as an important engine to support economic growth, the future of the economy will be significantly reduced, for this reason, must be from the perspective of expanding domestic demand to promote economic growth, so that the internal circulation is smooth, in order to make domestic demand continue to exert force.
Exports and Real Estate in 2022:
The growth rate may decline significantly
China's economic growth in the past two years has been driven mainly by exports and real estate. In 2021, the mainland's exports grew by 21.2%, once again exceeding expectations; although the growth rate of real estate development investment has declined, the average growth rate in two years is 6%, which is significantly higher than the growth rate of fixed asset investment.
Contribution of the three major demands to GDP growth (%)
Source: wind, Zhongtai Securities Research Institute
In 2022, in the context of a high base of export scale, it is generally believed that it is difficult for exports to maintain double-digit growth, especially the outbreak of the Russian-Ukrainian conflict, which has led to another surge in the prices of commodities such as crude oil and grain, adding to the global economy, which already has a supply gap. At present, China's export share of the world has reached 16%, far ahead of other countries. Under the background of the accelerated decline of the working-age population and the high average age of workers, there is not much room for improvement.
Year-on-year growth rate of mainland export and import prices (%)
If the Conflict between Russia and Ukraine continues or even expands, coupled with the continuation of the epidemic, it is expected that international transport prices will rise this year, which will also adversely affect export growth. In addition, it is expected that the RMB exchange rate will still appreciate moderately this year, which is also not conducive to exports. Export growth is estimated to fall back to a level close to nominal GDP growth in 2022.
In this year's government work report, it is still proposed to "adhere to the positioning that houses are used to live, not to speculate", and also mentioned that "because of the city's policies to promote the virtuous circle and healthy development of the real estate industry". It can be seen that real estate still cannot be used as a heavy tool to drive the economy. In 2021, the amount of real estate development investment will account for 26.7% of the total fixed asset investment, and if the growth rate of real estate investment declines further this year, it will have a greater impact on fixed asset investment.
At present, the inventory of residential real estate is lower than the level of 2014, and there is no record inventory due to overinvestment. This is fundamentally different from the real estate industry crisis caused by the contraction of high supply land and demand in the previous domestic and foreign real estate cycles. Moreover, some domestic leading developers are facing liquidity pressure, and it is uncertain whether the negative growth of the newly started area this year can be reversed.
Since the downward growth rate of this round of real estate investment is mainly caused by supply-side factors (such as three red lines), there is no cliff-like decline on the demand side, so the risk of the real estate bubble bursting is not large. But be aware of the risk of insufficient demand due to the decline in the expected return on investment in real estate.
A negative feedback mechanism in the real estate industry is taking shape
Source: Chen Li, real estate industry analyst of Zhongtai Securities Research Institute
Simply calculated, assuming that the growth rate of real estate development investment is negative, the growth rate of infrastructure investment must reach more than 10% in order for the growth rate of fixed asset investment to rebound from 2021 – which is also a prerequisite for achieving this year's GDP target.
Is there a correlation between the epidemic and the war?
Look deeper into why the global economy is entering a recession cycle
The British economist Malthus' Theory of Population, published in 1798, proved to be the most influential and controversial work in history, in which Malthus pointed out that plague was an important means of achieving a balance between population and food in nature.
His theory of population growth traps proposes two kinds of inhibition: when population growth exceeds the growth of the means of subsistence, and there is an imbalance between the two, the laws of nature force the two to balance. There are also two means to achieve balance, one is war, famine, plague, etc., which is "positive inhibition"; the other is to ask those who cannot afford to support their children not to marry, which is "moral inhibition".
Before the end of World War II, the global population was about 2.6 billion, and now it has exceeded 7.6 billion, and in just 77 years, the global population has nearly tripled, the miracle of high population growth has exceeded any stage in human history, and India's population size has surpassed China. The rapid expansion of the population has brought two problems, one is the great damage to the natural world, and the other is the intensification of human income and wealth differentiation.
In its Life of the Planet 2020 report, the World Wide Fund for Nature (WWF) notes that global wildlife populations have fallen by nearly 70 percent in less than 50 years, with 75 percent of land and 40 percent of the oceans being irreversibly and permanently damaged. Humans have overused more than half of the planet's resources, and deforestation and agricultural expansion are the main reasons for the sharp decline in wildlife, as one-third of the land area and three-quarters of freshwater resources are used for food production.
Viruses are actually the deep self-defense mechanism of nature, and their purpose is to control the over-reproduction of biological populations and destroy ecosystems, so some viruses are in many specific wild animals in the depths of nature, and they are safe when they are not exposed. Population growth has led to more and more natural resources occupied by human beings, and when we overexploit the earth's resources, more and more viruses are spreading, and this defense mechanism is activated.
This round of new coronavirus is circulating in the world for three years, and the virus is constantly mutating, and it is difficult to judge when it will end. The virus is particularly harmful to the elderly, such as the 850,000 deaths in the United States due to the epidemic, 65-year-olds account for about 80%, and we are in the highest aging stage in human history.
Behind the Russo-Ukrainian War, there was actually a conflict between Russia and Europe and the United States, which made everyone worry about the Third World War. Since the end of World War II, mankind has gone through a relatively long period of peace in history. Peace leads to an widening of the income gap between the inhabitants, which can be explained in theory and confirmed in reality.
For example, Piketty, the author of "Capital in the Twenty-first Century", observed the ratio of capital/GDP and found that for a long time after 1700, the capital scale of Britain, France, and Germany was about 6-7 times that of GDP, and it was not until after the outbreak of the world war that the proportion began to decline, and the lowest dropped to 2-3 times. But after the end of World War II, the proportion began to rise again. By 2010, the capital/GDP of the United Kingdom and France was about 5-6 times that of Germany, and about 4 times that of Germany.
In 1925, the American writer F. Scott Fitzgerald published the novella "The Great Gatsby" set in New York in the 1920s, telling the story of a low-class person who struggles and eventually dies.
Later, the Canadian economist Clark drew a "great Gatsby curve" that illustrates a socioeconomic phenomenon in which highly unequal countries have lower intergenerational mobility—the more unequal the society, the more the economic status of individuals is determined by the status of their parents, and the higher the likelihood that children will be in the economic class of their parents. This explains why as the global economy weakens, the lying rate is getting higher and higher as the rich get richer.
In the case of the United States, statistics show that the wealth of the richest 1% of the United States has continued to increase, accounting for 38.6% of the wealth of the United States in 2016, while the level of wealth and income owned by the public, which accounts for 90% of the total population, has generally declined in the past 25 years.
Share of wealth held by residents of the top 1% and 10% of major economies (%)
Source: World Inequality Database, Zhongtai Securities Research Institute
In addition to the differentiation of residents' income and wealth, there is also a relationship between countries' national strength. South American countries, for example, are rich in natural resources and have developed relatively quickly in the early days, but have fallen into a middle-income trap since the onset of the debt crisis in the 1980s. Russia, once a high-income country, has since returned to middle- and high-income countries; Ukraine's per capita GDP, once more than three times that of China, is now less than one-third of China's, making it the poorest country in Europe.
It is precisely because of the long-term peace that the GDP championship between countries has been sustained, and the gap between the rich and the poor in the world has widened, which has brought about serious economic and social structural distortions. Ray Dalio, founder of Bridgewater, points out that there are three aspects that are similar to those of 1935-1945: the debt cycle, internal contradictions, and external order. Both the long and short debt cycles are nearing the end, the central bank has limited room for stimulus; the gap between the rich and the poor is huge, the degree of political polarization is high, bringing about various internal conflicts; and the external pressure is also facing the reshaping of the world order.
In short, a global economic recession is inevitable, and some way to reshape the world order will also be inevitable, but it is best to avoid military conflict, because in the nuclear military era, the cost that humanity may pay for war is too great.
The total amount is gratifying, and the structure is worrying——
Why is internal circulation especially important?
China's economy has grown at a high rate over the past 40 years, with gdp rising from 5% to more than 17% of the world's gdp, largely thanks to reform and opening up. However, with the aging of the population and the decline in economic growth, the mainland proposed to build a new development pattern during the 14th Five-Year Plan period, that is, to accelerate the construction of a new development pattern with the domestic cycle as the main body and the domestic and international dual cycles promoting each other.
From the current point of view, the international environment is not as friendly as before, the epidemic continues, geopolitical conflicts continue, the United States in order to consolidate its hegemonic position, take various means to create trouble for China's opening up and cooperation. In particular, the Russian-Ukrainian military conflict at the beginning of this year has cast a shadow on the global economy in 2022. Therefore, we cannot expect too much from the smooth flow of external circulation.
In terms of the internal cycle, the current pressure is as described by the Central Economic Work Conference: domestic demand contraction, supply shocks and expectations weaken. This shows that the problem of poor circulation in the mainland has become more prominent, such as the average growth rate of consumption in two years is significantly lower than the pre-epidemic level, and the growth rate of infrastructure investment is close to zero.
Fortunately, last year's export momentum was still relatively strong, to a certain extent, to make up for the lack of domestic demand, so that the capacity utilization rate of the manufacturing industry will not fall sharply.
Consumption and exports in the post-PANDEMIC era (%)
Note: Each month in 2021 is the average growth rate of two years
Source: WIND, Zhongtai Securities Research Institute