Core ideas
Ø The outbreak of the Conflict between Russia and Ukraine has triggered concerns about the recession of the world economy, and the sanctions and counter-sanctions between the United States and Europe and Russia have led to a negative chain reaction gradually emerging. The negative impact of the Russian-Ukrainian conflict on the world economy may be concentrated in two aspects: First, it will continue to push up inflation, inhibit global transactions, investment and consumption, and increase the uncertainty of monetary policy in developed countries. Second, Europe is facing dual economic and financial pressures, and the growth rate may decline significantly, dragging down the recovery of the world economy.
Ø In February, the US CPI reached 7.9% year-on-year, continuing to exceed the Fed's average inflation target of 2%. Under high inflationary pressures, the Fed is likely to accelerate the tightening process, possibly raising interest rates by 50 basis points at the FOMC meeting in May, and still raising interest rates 3-5 times after June, and the balance sheet reduction may begin in July. The continued narrowing of the ten-year and two-year Treasury maturity spreads indicates a possible risk of recession in the U.S. economy.
Ø Affected by the large-scale suspension of work and production caused by the sharp rebound of the epidemic in many parts of the country, the PMI of the manufacturing industry weakened and contracted to 49.5 at the end of the first quarter; industrial production slowed down significantly; infrastructure investment maintained rapid growth and became the primary starting point for "stabilizing the economy"; the growth rate of manufacturing investment has slowed down; the downward pressure on real estate investment is still large; fixed asset investment has increased by 10.0%, maintaining a relatively stable trend; consumption has been greatly affected by the epidemic, but it can still maintain a positive growth of about 2.0%. The economic growth in the first quarter was about 5.0%, and the expected goal of "stable growth" was basically achieved.
Ø Looking forward to the second quarter, the epidemic situation is expected to be gradually controlled. With the resumption of work and production and the reopening of businesses, PMI is expected to expand again; industrial production is stable and rising; infrastructure investment and manufacturing investment maintain rapid growth to promote the smooth operation of fixed asset investment; and consumption rebounds rapidly.
Ø In the first quarter, the sales of commercial housing declined, the increase in house prices fell, the land transaction was sluggish, and the superimposed epidemic disturbance, the real estate market was in a comprehensive downward stage, and the growth rate of real estate investment may slow down to 1.5%. In the second quarter, despite the downward trend in mortgage interest rates, the sentiment of home buyers is difficult to improve significantly, house prices have further declined, the soil auction market is still difficult to improve, the debt risk of housing enterprises still exists, and real estate investment may bottom out after continuing to slow down.
Ø With the domestic epidemic disrupting supply, the global economy expected to slow down, and the European economy under pressure, the external demand pull may weaken, and the export growth rate in the first quarter may be 15%. In the second quarter, export supply will be dragged down by the lag of the epidemic, and there is still great instability and uncertainty in the superposition of the world, and it is expected that the export growth rate may further fall back to 12%. In the first quarter, under the support of stable domestic economic growth and high commodity prices, the import growth rate may be 13%, and the above supporting factors will be strengthened in the second quarter, but in view of the high base impact, the import growth rate is expected to slow down to 10%.
Ø Under the combined influence of the epidemic suppressing demand, the Russian-Ukrainian conflict raising oil prices, and the tail effect, the CPI in March may be weakened to 0.7% due to the downward trend of livestock meat prices. The Russian-Ukrainian conflict will continue to push up the mainland PPI, bringing imported inflationary pressures, and the PPI is expected to rise to 10.2% in March. The downward trend of the CPI and the rise of the PPI will make the scissor gap that has narrowed since October 2021 re-expand in stages.
Ø From January to February, under the influence of good economic fundamentals, large trade surplus and accelerated capital inflows, the RMB exchange rate trend was strong, fluctuating widely in the range of 6.30-6.38. In the second quarter, driven by the tightening of global monetary policy and the possible narrowing of trade surpluses and rising demand for international safe-haven, the renminbi may face phased depreciation pressure, and the exchange rate is expected to fluctuate in both directions in the range of 6.2-6.6, and the flexibility will increase.
Ø The recent epidemic has spread in many parts of the country, and the employment situation in the country is grim. Small and medium-sized enterprises and individual merchants may face tight cash flow, increased employment pressure in contact-intensive industries such as service industries, declining manufacturing operating rates or dragging down the completion of export orders, and the epidemic counterattack may interfere with the spring recruitment process of enterprises. Entering the second quarter, the relevant pressure will gradually ease.
Ø In the first quarter, the active fiscal policy was in the forefront, the progress of infrastructure and other related expenditures was accelerated, and the progress of local government special bonds issuance may reach 34%. In the second quarter, the intensity of expenditure on people's livelihood, science and technology, infrastructure and other related expenditures will be further increased, the progress of local government special bond issuance is expected to reach 60%, the tax reduction and fee reduction system arrangements will be implemented, and the central government's transfer payment to local governments will help the grass-roots implementation of policies.
Ø Due to insufficient demand, the task of "expanding the scale of new loans" in the first quarter is not small, and the growth of medium- and long-term credit is slow; credit growth rate may drop to 11.3%, and the growth rate of social finance will remain at the level of 10.2%. In the context of the tightening of monetary policy in major developed countries, the mainland has limited space to reduce policy interest rates, but it does not prevent monetary policy from maintaining a forward-looking loose operation. In the second quarter, it is still possible to maintain the reasonable growth of the total amount of credit by reducing the RRR and increasing open market operations; using structural policy tools to further reduce the cost of bank funds, promote the downward trend of loan interest rates in key areas, and increase credit support for weak links such as small and medium-sized enterprises and major national projects such as infrastructure.
01. The Conflict between Russia and Ukraine has triggered a downturn in the world economy and financial risks
The Russian-Ukrainian conflict broke out more than expected, triggering global fears of a world economic recession. Since the outbreak of the Russian-Ukrainian conflict at the end of February, the prices of commodities such as oil, natural gas, major grain varieties and precious metals have fluctuated sharply, making global inflation, which is already in an upward period, even more "adding fuel to the fire". With the fermentation of the Russian-Ukrainian conflict, the sanctions and counter-sanctions launched between the United States and Europe and Russia, as well as a series of negative chain reactions caused by them, have gradually become prominent, and their influence is concentrated in two aspects:
Chart 1: Energy and non-energy prices are rising rapidly
Source: Wind, Zhixin Investment Research Institute
First, the Russian-Ukrainian conflict triggered global inflation and inhibited global transactions, investment and consumption. Russian natural gas exports account for about 20% of the global export share, oil export share of more than 10%, the Russian-Ukrainian conflict hit the global energy supply; The total export of barley from Russia and Ukraine accounts for more than 32% of the global share, wheat exceeds 22%, Ukrainian rapeseed exports account for more than 15% of the global share, the situation between Russia and Ukraine affects global food security; Russia and Ukraine are also major exporters of metals and fertilizers, and the continued conflict between Russia and Ukraine will lead to a cliff-like decline in these export supplies, pushing up the level of global inflation, thereby inhibiting consumption and investment on a global scale. This seriously hinders the recovery of the world economy. In March, the OECD predicted that the Russian-Ukrainian conflict could reduce global economic growth by at least 1 percentage point and raise inflation by at least 2.5 percentage points in 2022. At present, the duration of the Russian-Ukrainian military operation is still relatively uncertain, but the sanctions and counter-sanctions between the United States and Europe and Russia have aggravated the global supply tension and may continue to limit the global supply capacity for a period of time to come. At present, the US inflation fever is not going away, and the US CPI in March is likely to break through 8% year-on-year, hitting a new high, and may remain high for several quarters, forcing the Fed to accelerate the tightening of monetary policy, bringing greater uncertainty to the world economy and the operation of global financial markets.
Chart 2: High inflation in the US and EUROPE since 2021
Unit: %
Source: Wind, Zhixin Investment Research Institute
Second, Europe is facing both economic and financial pressures, and the growth rate of the European economy may decline significantly, dragging down world economic growth. Since 2021, The european recovery has been relatively fragile, and after the epidemic has been controlled to a certain extent, European countries have relaxed the requirements for epidemic prevention and control, which has added great uncertainty to the economic recovery of Europe in the next few quarters. The European economy suffered the most from the Russian-Ukrainian conflict. Europe is heavily dependent on Russian energy, Europe consumes 46% of coal, 45% of natural gas, 27% of crude oil imports from Russia, Europe followed in the footsteps of the United States to join the ranks of sanctions against Russia, will greatly increase European energy prices. Based on the relatively close economic, trade and financial investment exchanges between Europe and Russia, after cutting off Russia's financial channels for external receipts and payments, it will inevitably lead to a large number of debt defaults, and some small and medium-sized financial institutions may be hit, and it is not excluded that a large-scale risk contagion will contribute to systemic financial risks. By the end of 2021, Russia's external debt was as high as $478.2 billion, and the proportion of European debt was relatively high. Both of these pressures could put Europe at risk of recession. On March 10, the European Central Bank cut its 2022 GDP growth forecast for the euro area to 3.7 percent, compared with a previous forecast of 4.2 percent. As the situation further deteriorates, economic growth is expected to decline further. Eurozone economic growth is expected to fall below 3% in 2022.
02. The Fed may step up its tightening efforts
The Fed raised interest rates by 25 bp in March, raising the federal funds rate to 0.25%-0.5%, in line with market expectations. Fed Chairman Jerome Powell said he would discuss details of the specific balance sheet reduction plan at the May meeting. The dot plot shows that the FOMC Committee's expected median federal funds rate is 1.9 percent, a possible seven-time rate hike during the year.
Inflation is the primary factor in determining the Fed's subsequent path to rate hikes. Since last year, inflation in the United States has been high, continuing to exceed the Fed's average inflation target of 2%, and under the combined effect of geopolitical crisis and supply chain bottlenecks, there have been widespread price increases in energy, food, rent, clothing, health care, transportation and other fields. However, in addition to the over-issuance of currency, supply chain tension is a more important trigger for high inflation in the United States, so monetary policy alone cannot solve the problem from the root cause.
Under the influence of repeated epidemics and geopolitical conflicts, some commodity prices soared in the first quarter, putting huge upward pressure on inflation in the United States. In the coming months, whether the shortage of energy and agricultural supplies can be alleviated will still depend on the direction of the situation in Russia and Ukraine. The impact of the Russian-Ukrainian conflict will continue to affect the international crude oil supply for a long time, and the price of WTI crude oil may fluctuate widely around 100, and the possibility of creating a stage high is not ruled out. The U.S. CPI is expected to exceed 8% year-over-year in the coming months.
With inflation remaining high, the Fed may tighten its grip. To demonstrate its determination to fight inflation, the Fed is likely to choose to raise rates by 50 basis points at the FOMC meeting in May, followed by another 25 basis points in June, and begin to shrink its balance sheet at the July meeting. The Fed will continue to try to curb inflation expectations through hawkish forward guidance.
Narrower ten-year and two-year Treasury maturity spreads could limit the Fed's monetary policy space. After the March FOMC meeting, the ten-year and two-year maturity spreads on U.S. Treasuries narrowed rapidly, with only 20 basis points remaining, and an inversion of the term spread would weaken the profitability of U.S. financial institutions, lead to a tightening of credit conditions, and indicate that the economy is likely to enter a recession. There are already concerns in the market. If the Fed raises interest rates sharply in a row, asset price volatility could continue to rise, increasing systemic risk in U.S. financial markets.
Chart 3: Ten-year and two-year Treasury term spreads
Unit: %
Source: Wind, Zhixin Investment Research Institute.
03. PMI may shrink in stages
Affected by multiple factors such as the escalation of epidemic prevention and control control, the manufacturing PMI may temporarily be below the boom-bust line in March. The manufacturing PMI recorded 50.2 in February, not only accelerating expansion, but also being in the boom range for four consecutive months. However, the manufacturing PMI may contract in March under the influence of multiple complex factors such as the sharp rebound of the national epidemic leading to shutdowns and transportation in many places, the increase in inflation caused by the Russian-Ukrainian conflict and the sharp fluctuations in the capital market, as well as the pressure of the Depreciation of the renminbi brought about by the Fed's interest rate hike. This round of epidemic prevention and control has a greater impact on the production of many export-oriented cities in the east and southeast. It is estimated that the areas that have stopped work and production will lose about 300 billion yuan of exports, accounting for about 1.4-1.5% of the country's total exports in 2021. Limited production capacity will greatly drag down the acquisition of domestic orders and export orders, and the suspension of work and production will have a greater impact on employment, while the re-escalation of epidemic prevention and control and the recent international situation leading to domestic capital market shocks and inflation will also hit producers' confidence in the future prospects. However, the mainland manufacturing industry resilience is strong, the normalization of the economy of many countries will continue to promote external demand, higher commodity prices also have a certain support for the index while stabilizing growth " The policy effect is landing, and the possibility of a similar plunge in the manufacturing PMI in March is very small, and the possibility of a slight decline below the boom-bust line is greater. The PMI index is expected to be 49.5.
Figure 4: Changes in PMI by Sub-item in China
Unit: %
Source: Wind, Zhixin Investment Research Institute
In the second quarter, the manufacturing PMI will return to the expansion range. The national outbreak is expected to be gradually brought under control in April. The confidence of producers and upstream and downstream industrial chains will gradually recover, the rapid recovery of residents' consumption willingness, driving the rapid rebound of production and demand, coupled with the continuous recovery of external demand and the signs of easing of the situation in Russia and Ukraine, the manufacturing PMI is expected to return to the boom-bust line in April and maintain an expansion trend in the following two months.
04. Industrial production is stabilizing and slowing down
Affected by the epidemic, industrial production slowed down significantly in March. From January to February, the country's industrial production maintained a rapid growth trend. The industrial added value increased by 7.5%, and the year-on-year growth rate accelerated for four consecutive months. As industrial production took the lead in recovering to pre-pandemic levels and is more resilient, it is less sensitive to a rebound from the epidemic. High-frequency data in March showed that production continued to advance steadily. With the end of the heating season production limit and the Winter Olympic production limit, and the central and western regions where blast furnaces are mainly distributed are less affected by this round of epidemic than in the eastern region, the blast furnace operating rate of major domestic steel enterprises has risen sharply to more than 80%. Average daily production of crude steel and steel was higher than the same period in the previous month. Although the load rate of polyester staple fiber devices in China was affected by the suspension of work and production, the operating rates of polyester filament yarn and downstream looms in Jiangsu and Zhejiang were 90.62% and 65.86% respectively, higher than in the previous 2 months. The operating rate of semi-steel tires and all-steel tires in automobiles was significantly higher than in the previous two months. The overall operating rate of PTA and PX also continued to remain high. However, the nationwide epidemic has led to the suspension of production in some areas, which has indeed caused a drag on industrial production, and excavators in March 2022 may fall by about 49% year-on-year, a decline of 36 percentage points from February, of which domestic market sales fell by about 58%. Taken together, industrial production growth is expected to slow down significantly to 5.5% in March.
In the second quarter, industrial production is expected to resume growth relatively quickly. As the epidemic is gradually controlled, the production shutdown in some areas will also be restored, and the production end will be normalized. Under the recovery of the demand side, the growth rate of industrial production is expected to accelerate again. It is expected that the growth rate of industrial added value in the second quarter will reach the range of 7-8%.
Chart 5: Growth rate of industrial value added
Unit: %
Source: Wind, Zhixin Investment Research Institute
05. Investment in fixed assets has accelerated its recovery
Fixed asset investment in the first quarter will continue to maintain steady and rapid growth. In the first two months of this year, the steady growth policy effectively promoted a sharp rebound in fixed asset investment, with a growth rate of 12.2%, 7.3 percentage points faster than in 2021.
Driven by factors such as fiscal strength and sufficient projects, infrastructure investment has advanced at a high speed. First, financial support has been increased. Since the beginning of this year, the pace of special bond issuance has been significantly pre-empted. As of March 24, the issuance of local bonds has exceeded 1.5 trillion yuan, of which more than 1.1 trillion yuan has been issued of new special bonds, and the scale of local bond issuance in the first quarter is expected to exceed 1.6 trillion yuan. Second, the use of special bonds is more reasonable and effective. The Ministry of Finance has strengthened and improved the policies and measures of local government debt management, guided local governments to do a good job in bond issuance and use, improved the efficiency of the use of funds, and promoted the formation of bond funds into physical workload as soon as possible. Third, investment projects are relatively sufficient. "Two new and one heavy" has become the focus of capital investment, and the project reserves of various provinces and cities are relatively abundant. The fourth is to improve the efficiency of project management. Relevant departments have made great progress in advance planning, preferential projects, pooling debt funds, project asset management and capital risk management. However, the production shutdown caused by the rebound of the epidemic has had a significant impact on producers and construction sites in some areas. According to rough statistics, the proportion of construction sites in the epidemic control area with closed management is about 47%, affecting the cumulative consumption of rebar by about 2.4 million tons, and affecting the overall construction industry by about 1.5%. Considering that in recent years, the added value of the construction industry has remained at about 7% of the GDP and the number of employees in the construction industry in the whole society, so the construction industry will affect the GDP by about 0.1 percentage points.
Affected by the epidemic, the high level of manufacturing investment fell. Although external demand continues to recover, the suspension of work and production caused by the sharp rebound of the epidemic will have a considerable impact on the business activities of small and medium-sized private enterprises and the normal production of export enterprises, thus dragging down the growth rate of manufacturing investment. Although the growth rate of real estate investment in the first two months has exceeded market expectations, it is still in a downward trend, and the impact of the epidemic on it is relatively limited. Infrastructure investment is still a stable fixed asset investment and economic growth of the "ballast stone", manufacturing investment although the growth rate has declined, but can still play the role of investment "balancer", "stable real estate" policy frequently makes real estate investment is difficult to appear significant stall. Fixed asset investment is expected to increase by 10% in March, of which infrastructure investment increased by 8.5%, manufacturing investment increased by 16%, and real estate investment increased by 1.5%.
Looking forward to the second quarter, infrastructure investment and manufacturing investment continue to promote the rapid growth of fixed asset investment. The follow-up issuance of local bonds will still maintain a relatively fast pace, and the effect of boosting infrastructure investment will further appear. Many places have begun to disclose their plans for the issuance of local bonds in the second quarter. As of March 24, the amount of new special bonds issued and disclosed across the country exceeded 1.2 trillion yuan, accounting for about 84% of the amount of early approval in 2022. With the fading of the impact of the epidemic, the operating conditions of private enterprises have improved, and the enthusiasm for investment has increased again, driving manufacturing investment to maintain rapid growth. Under the continuous introduction of the "stable real estate" policy, real estate investment may also bottom in the late second quarter.
Chart 6: Growth rate of investment in fixed assets
Unit: %
Source: Wind, Zhixin Investment Research Institute
06. The real estate market is building a bottom
Due to the strong wait-and-see mood of residents and the disturbance of the epidemic, by mid-to-late March, the transaction area of commercial housing in 30 large and medium-sized cities in the country decreased by 16% compared with the same period last year. Among them, the year-on-year decline of more than 50%, the sluggish demand in third-tier cities has become the main reason for the drag, the sales of first- and second-tier cities have also declined, and the commercial housing market has entered the destocking stage. House prices continue to decline, in addition to Beijing, Shanghai, Hainan and other local areas of housing prices are relatively firm, most of the city house price growth narrowed or fell the number of cities increased. The land auction market is still relatively sluggish, the national land transactions fell by 25.6% year-on-year, which was 7 percentage points larger than the decline in February, and the decline in full-caliber land transactions continued; the overall land supply continued to be weak, resulting in a rapid increase in land prices, but the downward speed was controlled in March, and the land supply in first-tier cities increased, offsetting the decline in third-tier cities. Housing finance marginal improvement, residential mortgage interest rates accelerated in March, but mortgage loan growth continued to decline; housing enterprise development loan growth rate is still in the negative range, March credit bond issuance scale is less than expected, down 35% year-on-year, some private enterprises issued Chinese dollar bonds, the cost generally exceeded 10%.
Real estate investment grew at 3.7% in February, higher than market expectations, mainly due to a 11.3% year-on-year increase in land acquisition costs. Land purchase fees usually lag behind the land transaction for about three quarters, so since June 2021, after the adjustment of the soil auction rules, the lag of the rapid decline in land transactions will gradually be reflected in the subsequent time period of this year, combined with the current poor start of new housing construction, insufficient funds for construction and security projects, and it is expected that the growth rate of real estate investment in the first quarter may drop to 1.5%.
Looking forward to the second quarter, the regulation and control of the real estate market will emphasize the three stability policies, further release the signal of stability maintenance, and highlight the "policy of the city". It is expected that the central bank will further promote commercial banks to meet the loan needs of first-time home buyers, accelerate the release of housing loans and slightly reduce mortgage interest rates, and promote the rapid recovery of personal mortgage loan growth. Cities with relatively deserted property markets will gradually cancel restrictive measures for house purchases, and moderately relax the threshold of provident fund loans, and conditionally reduce the down payment or the proportion of two sets of mortgages to activate market sentiment. All kinds of financial institutions will provide sufficient financial support to qualified housing enterprises, including appropriately relaxing the pre-sale fund supervision system, increasing credit support, promoting project mergers and acquisitions, and introducing asset management companies such as AMC to alleviate the operation, cash flow and debt risks of housing enterprises.
Chart 7: Real estate investment in the first quarter is in a downward phase Unit: %
Source: Wind, Zhixin Investment Research Institute
In the second quarter, the downward trend of the real estate industry will slow down. After the temporary factors such as the epidemic have faded, the sales of commercial housing in key cities may take the lead in improving, and drive the improvement of the land market in corresponding areas, and the decline in house prices will gradually converge, and the real estate market is expected to stabilize. Considering that housing enterprises will still face financial pressure, it is difficult for new housing starts and construction projects to quickly get rid of the downward channel, and the growth rate of real estate investment may fall into a negative range at the beginning of the second quarter. New and second-hand housing prices across the country are expected to fall by 1%-1.5% year-on-year.
07. Consumption growth has fallen rapidly in stages
Mainly affected by the repeated impact of the epidemic, consumption in the first quarter weakened rapidly. In the first two months of this year, driven by factors such as the Spring Festival holiday and the Winter Olympic fever, consumption rebounded at a low level. Entering March, the sharp rebound of the epidemic has had a great impact on the continuous and steady repair of consumption. This round of the epidemic is the most severe since April 2020, and the impact on consumption is second only to 2020. Epidemic prevention and control measures in many places have been increasing, and the flow of people in the city and across regions has decreased significantly. The average congestion index of the 100 cities and the average passenger traffic of the 10 cities metro were low in the same period, only higher than in 2020. Metro passenger traffic in the 10 cities was 14% lower than the same period last year and 12.8% lower than the historical average for 2018-2021. The restart of closure measures in many provinces and cities has led to the closure of offline physical stores, the agglomeration and close consumption have been greatly affected, and the decline in tourism, catering, and commercial housing sales has been obvious. Since March, hotel occupancy has fallen against seasonality, falling to 43.9% in the second week of March, compared to nearly 60% in the same period last year. Catering turnover fell rapidly. The "Delicious Don't Wait" platform's payment flow for the week of March 18 was down about 44% from the last week of February. Despite this, there were still a series of positive factors for consumption in March: rigid food demand and flexible demand for durable goods did not decline significantly; online consumption became one of the important channels to ensure the basic livelihood of residents; and automobile consumption was relatively good driven by improved supply. According to the Association, cumulative car sales in the first three weeks of March increased by 18% month-on-month compared with the same period in February.
On the whole, the growth rate of retail sales of consumer goods will drop significantly in March, but the possibility of negative growth is small. Looking back at the first quarter of 2020, strict quarantine measures led to a year-on-year decrease of about 15%-20% in the current period of national social security. From January to February 2020, the national social zero decreased by 20.5% year-on-year, and decreased by 15.8% in March. Suppose that the impact of this round of epidemic on consumption is half that of the time, and as of March 24, the social zero in medium- and high-risk areas in the country accounts for about one-third of the country. It has been calculated that the epidemic may drag down the social zero by about 3 points, so it is expected that the social zero will grow by 2.0% in March.
Chart 8: Retail sales growth rate of consumer goods
Unit: %
Source: Wind, Zhixin Investment Research Institute
In the second quarter, consumption is expected to rebound significantly. Once the epidemic is effectively controlled, the suppressed consumer demand will be released quickly. From the perspective of the structure of residents' expenditure, residential consumption accounting for 24% and education, culture and entertainment consumption accounting for 11% are easily affected by the epidemic, which is the main factor leading to the decline in consumption expenditure. However, these two expenditures are also more sensitive to the epidemic, and the rebound speed and intensity are also greater. With the more comprehensive balance between precise prevention and control and economic development, consumption will return to the repair channel after experiencing short-term epidemic disturbances.
08. Export concerns may appear
Under the influence of international turmoil and domestic epidemic interference, export concerns in March may appear. From January to February, exports increased by 16.3% year-on-year, achieving "stable opening of the door", and the realization of stable export growth in the beginning of the year mainly came from external demand stickiness and policy escort. In March, overseas demand was "mixed with good and bad", domestic production was significantly dragged down by the epidemic, and the slowdown in exports was reflected in the following aspects. First, domestic production in March was disrupted by the epidemic, which dragged down export supply. Parts of East and South China faced a shutdown, during which production and supply were frustrated. The BCI Job Acquisition Prospect Index recorded at 66.7 in March, the lowest level since September 2020. In contrast, the manufacturing of some economies in Southeast Asia has been repaired well, and in February, the PMI of Vietnam, Thailand and the Philippines was 0.4, 0.8 and 2.8 percentage points higher than the previous value. In the current situation where domestic production is subject to the epidemic and the general expansion of production in Southeast Asia, the share of mainland exports may face a certain degree of replacement. Second, the global economy is expected to slow down, the European economy is under pressure, and the external demand pull may weaken. In view of the high debt of emerging countries and the shortage of global food and energy, the United Nations Trade and Development Commission recently cut global economic growth from 3.6% to 2.6%. In particular, the European region is heavily dependent on Russian energy, and the Russian-Ukrainian conflict may be a drag on European economic growth. From January to February this year, the EU surpassed ASEAN and returned to China's position as the largest trading partner. Once global economic growth slows, the EU's pull on mainland exports will weaken significantly. As of March 23, ccfi and SCFI fell back to the level of November-December last year, reflecting the slowdown in demand and the international situation having a certain degree of negative impact on mainland exports. Third, although the situation overseas is turbulent, it is not excluded that exports are "organic in danger". In late March, the United States announced a re-exemption from some of its import duties against China. It is estimated that the goods on the current deferred list account for about 12% of the mainland's exports to the United States. At this time, the United States has re-exempted some import tariffs on China, which may prompt the demand for some Chinese goods to pick up. At present, the mainland still maintains trade exchanges with Russia and Ukraine, Russia accounts for about 2.3% of the mainland's total exports, when Europe and the United States impose trade and financial sanctions on Russia, the trade demand from Russia and related industries may be slightly boosted. Taken together, it is expected that the export growth rate in March may be 8%, and the export growth rate in the first quarter may be 15%.
Chart 9: BDI CCFI SCFI Index
Source: Wind, Zhixin Investment Research Institute
Looking forward to the second quarter, export growth will marginally slow. Affected by the epidemic, the follow-up export supply of Shanghai and Guangdong two major manufacturing production areas will be dragged down by lag, while the international situation is still unstable, European economic growth may decline, and overseas demand under the tightening of monetary policy in developed countries is difficult to be optimistic. In summary, it is expected that the export growth rate in the second quarter may fall back to 12%.
Supported by steady domestic economic growth and high prices of imported commodities, imports are likely to grow steadily in March. Imports in January-February increased by 15.5% year-on-year, showing a stable performance. In March, the steady growth of the domestic economy accelerated, and price factors continued to support imports. Financial and trade sanctions imposed on Russia by countries such as Europe and the United States will further exacerbate already high energy prices and bring new import cost pressures. Since the beginning of the year, the CRB Composite Index has risen by about 8.0%, and the CRB Industrial Raw Materials Index has risen by about 4.0%. As of March 23, the CICFI index has risen by about 2.0% since the beginning of the year, and the steady growth of the domestic economy will further strengthen the impetus for imports. On the whole, it is expected that the import growth rate in March may be 10%, and the import growth rate in the first quarter may be 13%. Looking forward to the second quarter, the factors supporting imports may strengthen, but under the influence of high base (44.1% year-on-year growth in the second quarter of last year), the growth rate of imports is expected to slow to 10% in the second quarter.
09. The price scissors gap may expand in stages
Falling livestock meat prices led to a downward trend in the CPI. In March, a new round of epidemic broke out across the country, and many cities have adopted different degrees of closed management, interrupting the consumption recovery process since the end of last year, making demand and supply contract at the same time; at the same time, the Russian-Ukrainian conflict raised international oil prices, and the fuel prices of transportation vehicles transmitted to the mainland rose rapidly; in 2021, the CPI was low before and after the high, there was a certain tail effect on the first half of this year, but by March it has gradually weakened, and the impact of the three is integrated, and the fluctuation of livestock meat prices may still be the dominant factor. The CPI may decline by some extent in March.
Specifically looking at the CPI sub-indicators, clothing, residence, daily necessities and services and education, culture and entertainment, accounting for about 46.46% of the CPI composition, may decline to varying degrees due to seasonal factors and the impact of the epidemic. Transportation, communications and medical care, the total proportion of 21.31%, may be due to the rise in international oil prices and the impact of the epidemic medical demand amplified, as of March 20, the national gasoline market price rose 8.22% month-on-month, up 37.63% year-on-year. Food, tobacco and alcohol accounted for about 30.1%, and the rise and fall in March was more complicated. On the one hand, the price of pigs, beef and mutton in March is still down, becoming a drag item of CPI, as of March 25, the average wholesale price of pigs, beef and mutton, down 50.07%, 1.37% and 10.35% respectively year-on-year, On the other hand, under the epidemic containment measures, there are different degrees of food rush purchases and poor transportation supply across the country, which may reverse the relationship between oversupply under the weakening of consumption in the short term, making other sub-CPI in addition to meat rise, supporting the overall CPI upward. Under the combined effect, the downward pressure on livestock meat may still dominate, and it is expected that the CPI may fall to 0.7% in March, affecting the downward trend of CPI to 0.8% in the first quarter. Looking forward to the second quarter, the CPI may show a slow climb under the influence of many factors such as the gradual weakening of the tail factor last year, the completion of the bottom of the livestock meat price, the gradual recovery of institutional demand after the epidemic is controlled, and the possibility of oil prices remaining high.
Chart 10: Gasoline prices rise, pork prices fall Units: yuan / ton, yuan / kg
Source: Wind, Zhixin Investment Research Institute
The Russian-Ukrainian conflict pushed the PPI upward. Since the outbreak of the Russian-Ukrainian conflict, international energy, metals, grain and commodity prices have risen sharply, and sanctions by the United States and Europe have exacerbated this trend. At present, there is great uncertainty about the direction of the Russian-Ukrainian conflict, and the impact on global inflation has been caused and may continue in the coming period, while the mainland's energy, ferrous metals, timber, chemical raw materials and other imports are more dependent. Therefore, the Russian-Ukrainian conflict is expected to continue to push up the mainland PPI in the next one to two quarters, resulting in substantial imported inflation effects. In terms of PPI segments, mining, raw materials and processing rose by 33%, 17.9% and 6.6% respectively in February, pushing the increase of means of production by 11.4%. In March, this trend is likely to be significantly amplified, especially as a sharp rise in energy prices could dominate the PPI for some time to come. According to the Xinhua Shanxi Coal Price Index, as of March 22, coal prices rose by 76.57% year-on-year. PPI is expected to rise to 10.2% in March, pulling up first-quarter PPI to 9.6%. Looking forward to the second quarter, with the relaxation of epidemic prevention policies in the United States and Europe, global supply has recovered, which will alleviate global inflation pressure to a certain extent, but supply tension and The Russian-Ukrainian conflict still dominate the inflation trend, making the mainland PPI remain high.
Chart 11: Price scissors gap has narrowed since October 2021 Unit: %
Source: Wind, Zhixin Investment Research Institute
Since October 2021, the price scissors gap has shifted, from 12% (PPI-CPI) to 7.9% in February 2020. The downward trend of CPI and the rise of PPI in March have re-expanded the scissors gap, which means that middle and downstream enterprises may usher in a new round of profit dilution pressure.
10. The two-way fluctuation range of the RMB exchange rate has increased
In the first quarter, the RMB exchange rate was strong overall, showing a "V" shaped trend in the range of 6.30-6.38, and the two-way fluctuation increased. From January to February, supported by good economic fundamentals and balance of payments, the RMB exchange rate continued its strong trend since the fourth quarter of last year, rising from 6.38 at the beginning of the year to 6.30. The first reason is that the easing policy supports the steady growth of the domestic economy, and the recovery of the national economy in January and February is significantly better than expected. Second, a good balance of payments supports the RMB exchange rate. From January to February, the mainland's trade surplus reached US$115.96 billion, an increase of about US$19 billion over the same period last year. In the same period, the mainland's actual use of foreign capital was 45.2% year-on-year, at a historical high in the past 10 years. Third, the global situation is turbulent, and the safe-haven attribute of RMB assets has emerged. The repeated epidemic and the Fed's interest rate hike expectations have led to a significant increase in global financial risks, while the domestic economic and market environment of "low inflation + easing policy + relatively low valuation" has enhanced the attractiveness of RMB assets to international capital. In late February, the offshore dollar-to-renminbi exchange rate reached 6.3072 at one point, the highest exchange rate in nearly four years. The one-year USD/CNY NDF fell from 6.52 at the beginning of the year to 6.48 in mid-March, confirming that international investors maintain strong confidence in RMB assets. However, since March, with the turmoil abroad and changes in monetary policies in major economies, the RMB exchange rate has depreciated from 6.30 in early March to 6.37 at the end of March. The periodic fluctuations of the RMB exchange rate here are mainly due to the impact of short-term capital outflows under securities investment, with a net outflow of 60.1 billion yuan from Northbound Funds in March (as of March 23), a significant contrast with the net inflow of 20.7 billion yuan from January to February, and the overseas holdings of domestic bonds (the sum of the caliber statistics of the Shanghai SSE and the Central Clearing and Settlement Corporation) decreased by 80.4 billion yuan in February, the first month-on-month negative increase since March last year.
Chart 12: USD/CNY exchange rate and USD index
Unit: YUAN/USD
Source: Wind, Zhixin Investment Research Institute
Looking forward to the second quarter, the RMB exchange rate still has some resilience, but it may face phased depreciation pressure. Subsequent overseas demand may weaken, domestic export supply is dragged down by the epidemic, and the trade surplus may narrow. The volatile situation in Russia and Ukraine, investors are worried that international sanctions may affect China, and their negative spillover effects may form a certain degree of inhibition on cross-border capital inflows. Overseas monetary policy is uncertain, and the Fed may raise interest rates by 50bp at one time, which will not rule out short-term pressure on the RMB exchange rate. It is expected that the RMB exchange rate will fluctuate in both directions in the range of 6.2-6.6 in the second quarter, and the flexibility will increase.
11. Repeated outbreaks have put pressure on employment
Under the repeated epidemic situation, employment was under pressure in the first quarter. The urban survey unemployment rate of 5.5 percent in February has reached the upper limit of the full-year target. In the past, with the arrival of the "gold, silver and four" recruitment season, the unemployment rate will decline; this year, under the influence of the epidemic, many areas are still in a state of closure, production and consumption cannot be fully carried out, and there is still a lot of pressure to stabilize employment in the second quarter.
Market entities with poor anti-risk capabilities such as small and micro enterprises and individual merchants may have problems with cash flow, the confidence of business owners will be affected, and the demand for recruitment will decrease. Judging from the data in 2020, private enterprises in urban service industries such as wholesale and retail, accommodation and catering, leasing and commercial services, and resident service repair have been the most affected by the epidemic.
Since mid-March, the shanghai subway passenger traffic has decreased by 2/3 compared with the beginning of March, public places such as movie theaters, museums, amusement parks and other public places have been closed, the attendance rate of restaurants has dropped significantly, the occupancy rate of takeaway riders is less than 50%, and the employment of the service industry has been greatly affected.
The decline in the operating rate of manufacturing enterprises has dragged down the progress of export order completion and affected the subsequent start-up arrangements of factories. The export sector provided about 140 million jobs in 2021, accounting for 19% of China's total employment, and the epidemic has hit labor-intensive industries such as clothing, shoes and hats the hardest.
Enterprise spring recruitment may be blocked, which will have a certain impact on the employment of college graduates. The surveyed unemployment rate for the 16-24-year-old population in February was 15.3 per cent, 2.2 per cent higher than in the same period last year, and the unemployment rate for the youth population is likely to remain stubborn if spring recruitment is not carried out properly.
Figure 13: Map of the existing epidemic situation in the country
Unit: Person
Source: Sina, Zhixin Investment Research Institute.
12. The intensity of active fiscal policy expenditure has been further increased
The proactive fiscal policy in January and February is obvious, but the epidemic in many places in March may affect the progress of expenditure. The specific performance is as follows: First, the progress of fiscal expenditure has accelerated, and the scale of expenditure is more than 550 billion yuan more than last year. Second, infrastructure-related expenditure has increased. Urban and rural communities, agriculture, forestry and water, transportation and other related expenditures of 723.1 billion yuan, an increase of 53.4 billion yuan over last year, an increase of 8% year-on-year, the policy support infrastructure force effect is remarkable. The third is the pre-issuance of local government special bonds. As of March 28, local government special bonds issued 1.2 trillion yuan, and the progress of issuance in the first quarter will be significantly faster than in 2019 (31%) and 2020 (29%). Fourth, there is still a lot of room for expenditure on fiscal deposits, but the epidemic in March may affect the progress of expenditure. Fiscal deposits increased by 1.19 trillion yuan in January and February, an increase of 863 billion yuan over the same period last year, indicating that there is still a large space for fiscal expenditure, but in March, the epidemic situation was concentrated in many places, shenzhen, Changchun and other places were "locked down", and the progress of fiscal expenditure may be affected to a certain extent.
Chart 14: General public budget revenue and expenditure cumulative year-on-year Unit: %
Source: Wind, Zhixin Investment Research Institute
In the second quarter, the intensity of fiscal expenditure will be further increased, and specific policy arrangements such as tax reductions and rebates will be accelerated. The focus of active fiscal policy is relatively clear: continue to increase expenditure on education, medical care and other people's livelihood-related expenditures and infrastructure-related expenditures, and the new fiscal deposits added in the first quarter will be released in the second quarter; The scale of local government special bond issuance may decline slightly, but it will still maintain a certain pace of issuance, which may exceed 1 trillion yuan, and the issuance progress in the first half of the year is expected to exceed 60%, reaching the same period in 2020; The implementation of the tax reduction and fee reduction system arrangement is expected to complete the tax rebate work for all small and micro enterprises, and small-scale taxpayers will also receive policy preferences for exemption from part of the value-added tax; Increase the scale of transfer payments, the central government provides 1.2 trillion yuan to specifically support local finances to implement tax reductions and fee reductions and people's livelihood expenditures; 400 billion yuan of transfer payment funds have been issued and will be used to support small and micro enterprises in the second quarter to retain tax rebates. The policy effect of the proactive fiscal policy on stabilizing growth will be reflected in the second quarter.
13. Prudent monetary policy maintains forward-looking loose operations
Due to the relative lack of demand, credit growth in January-February this year was less than expected, and new credit is expected to pick up in March. From January to February, medium- and long-term credit increased by 1.2 trillion yuan year-on-year; residents' short-term and medium- and long-term balances declined to varying degrees, reflecting the weak consumption of residents and insufficient demand for housing mortgages after the Spring Festival; and the medium- and long-term credit of enterprises increased by 534.8 billion yuan year-on-year, indicating that there is still a shortage of construction and investment momentum. At present, the task of "expanding the scale of new loans" is becoming more difficult, and it is necessary to "use reserve policy tools in a timely manner". In March, the Financial Commission of the State Council stressed that "monetary policy should be proactively responded to, and new loans should maintain moderate growth." As of March 25, the central bank repurchased 610 billion yuan, with a net return of 790 billion yuan; MLF over-continued, with a net investment of 100 billion yuan; In March, DR007 remained at an average of about 2.07%, which is within the scope of the central bank's interest rate regulation, and the overall situation of market liquidity is stable. In the context of tighter global liquidity and lower average domestic interest rates, it is not a good time for the mainland to cut LPR interest rates, and LPR rates remain unchanged in March.
The pandemic in March affected the growth of consumer and personal mortgage loans, but banks may accelerate the release of real estate development loans and M&A loans as required by the policy. The rising demand for infrastructure and major project financing is expected to drive the recovery of medium- and long-term credit growth. Rising demand for note financing at the end of the quarter is likely to drive a pick-up in credit. It is estimated that the new credit in March may be about 3 trillion yuan, and the growth rate of credit balance may drop by 0.1 percentage points to 11.3%; the increase in social financing may be about 3.6 trillion yuan, and the growth rate of social financing stock may continue to remain at the level of 10.2%.
Chart 15: Social Finance, Credit and M2 Growth Rate Unit: %
Source: Wind, Zhixin Investment Research Institute
In the context of the tightening of monetary policy in major developed countries, the space for the mainland to reduce the policy interest rate in the second quarter is relatively limited, but it does not prevent the prudent monetary policy from maintaining a forward-looking loose operation, and the central bank will pay attention to the policy combination of total amount and structure. The sino-US interest rate differential has narrowed to a lower level and will narrow further, and the mainland is no longer suitable for cutting policy interest rates. After the Fed raised interest rates by 25 bp, the interest rate spread between the Us and China 10-year Treasury yields has narrowed to about 50 bp, and the spread on the yield on the one-year Treasury has narrowed to below 80 bp. This round of Fed interest rate hikes will likely exceed 100bp, at which point the mainland's downward policy rate adjustment may accelerate the inversion of Sino-US interest rate differentials, increasing the pressure on the outflow of cross-border capital from the mainland and the pressure of RMB depreciation. With domestic inflation expected to rise and deposit rates low, real interest rates are rapidly falling.
Monetary authorities will maintain liquidity and steady growth in total credit through RRR cuts and increased open market operations. Use window guidance to further reduce the lending costs of commercial banks and promote the steady decline of loan interest rates. It is possible to reduce the refinancing and rediscount interest rate of structural monetary policy tools, give full play to the dual advantages of structure and price, and focus on supporting credit growth in weak links such as small and medium-sized enterprises. Continue to reduce the interest rate of small refinancing, and promote credit support for major national projects such as advanced manufacturing, high-tech industries, green industries, inclusive finance, and infrastructure. Improve the financial environment of the real estate industry, relax the supervision of off-balance sheet financing business to a certain extent, maintain the reasonable liquidity of real estate enterprises, and prevent and resolve related financial risks.
In the second quarter, the market financing demand may be gradually released, the scale of new credit is expected to be between 5.6 and 6 trillion yuan, and the growth rate of credit balances is between 11.3% and 11.5%; the increase in social financing may be about 8.1 to 8.5 trillion yuan, and the growth rate of social financing stock is between 10.3% and 10.5%.
14. The economic operation in the first quarter is basically in line with the policy tone of "steady growth"
Although all data have declined to varying degrees due to the rebound of the epidemic in March, the better economic data in the first two months makes it possible for GDP in the first quarter to run within the expected target of "stable growth". Consumption, investment and exports increased by about 5.1%, 10% and 15% respectively in the first quarter, which can drive GDP by about 2.5, 2.4 and 0.15 percentage points respectively according to the average contribution rate of the past decade. As a result, GDP growth is likely to reach about 5% in the first quarter, up from 4.0% in the fourth quarter of 2021.
The basic characteristics of the mainland's economic operation in the first quarter of 2022 are that under the influence of international complex factors, the impact of imported inflation on domestic prices has begun to appear; the epidemic has repeatedly inhibited the recovery of domestic demand and weakened supply capacity; the overall downturn in the real estate market has put pressure on investment and consumption; and the proactive fiscal policy has effectively promoted fixed asset investment, especially infrastructure investment, which has rebounded sharply and promoted the development of domestic demand. The overall trend that may occur in the economic operation in the second quarter is that the domestic epidemic situation is gradually and effectively controlled, and consumer demand tends to pick up; the real estate industry may bottom out, and the pressure on investment and consumption will gradually stabilize; and the positive fiscal policy effect will enter the main stage of force with the strong support of monetary policy, promoting a sharp recovery in domestic demand. In the second quarter, attention should be paid to the risk of imported inflation resulting from a sharp rise in energy prices brought about by the Russian-Ukrainian conflict, the tight monetary policy spillover effect of the Fed's interest rate hike, and the risk of contraction of external demand brought about by the downturn in the European economy affected by these two factors.
At present, there is a big gap between the medium-high growth of the macro economy and the feelings of micro subjects. We believe that the mainland's economic growth rate is gradually returning to the potential level, and it is unlikely that there will be a big jump, and a gradual process is needed. In economic operation, policy is an important variable. The policy continues to strengthen the expectation of stability as the mainstay, multi-pronged efforts to promote stable economic growth, and the real manifestation of its effect will start from some areas, and it is impossible to benefit all fields from the beginning, but a process from point to point. In addition, the continuous recurrence of the epidemic has led to the general obstruction of production, investment and other business activities, and delayed the landing process of relevant policy effects. The international situation has taken a sharp turn for the worse, and uncertain and unstable events have followed, which has damaged the expectations of micro subjects and lacked confidence. Considering the factors such as the high and low base last year, the possibility of effective control of the epidemic and the further intensification of the government's "steady growth" policy, the GDP in the last three quarters is expected to show a quarterly increasing trend, and economic growth is expected to achieve the expected policy goals.