Zhong Zhengsheng: What signals does the latest macroeconomic data released for 2022 reveal?

Original by Zhong Zhengsheng Zhang Deli China Newsweek 2023-01-17

In 2023, policies need to be coordinated

Expand domestic demand and smooth internal circulation

Under the protection of various policies, in the market entity

In the expected improvement, China's economy is on the road to normalcy

Or it will be faster and more solid

In the fourth quarter of 2022, China's real GDP increased by 2.9% year-on-year and 3% year-on-year for the whole year, both exceeding market expectations, and China's economy ushered in a new chapter in the steady progress.

Judging from the main economic indicators in December 2022, production weakened under the impact of the epidemic, but domestic demand indicators began to pick up, which is a positive signal. In particular, infrastructure investment continues to play a supporting role, the manufacturing boom continues, and the real estate market is improving, making the key role of investment in optimizing the supply structure begin to appear. The rapid repair of consumption, especially commodity retail, allows us to see the room for improvement of consumption as an engine of "internal circulation".

Looking forward to 2023, after the weakening of exports, policies need to make overall efforts to expand domestic demand and smooth the internal circulation. Under the active protection of various policies, in the expected improvement of market players, the normal return of China's economy may be faster and more solid, and we expect China's GDP growth rate to reach more than 5% in 2023.

In 2022, China's economy will continue to improve

China's real GDP grew by 2.9% year-on-year in the fourth quarter of 2022, higher than Wind's market expectations of 1.9%. The large gap between the actual value and the expected value may be due to: first, after the optimization of epidemic prevention and control, China's economy came out of the bottom of the "J-curve" earlier than expected; Second, quarterly GDP accounting is based on the production method and adds up the added value of various industries. Relative to demand, the production side in the fourth quarter of 2022 was less affected by the epidemic, and the high-frequency indicators on the demand side may have underestimated the recovery speed of China's economy. However, since the National Bureau of Statistics did not release the year-on-year GDP growth rate of various industries on the same day as it previously released the GDP data for the third quarter of 2022 (according to the practice of announcing annual GDP in recent years, the data is expected to be released on January 18, 2023), it is temporarily difficult to analyze the reasons for the above-than-expected GDP growth rate in the fourth quarter of 2022 from the perspective of the industry.

China's real GDP in 2022 will grow by 3.0% year-on-year, higher than market expectations of 2.8%, and the GDP growth target for 2023 is expected to be set at more than 5%. At present, all 31 provinces in the country have announced their own GDP growth targets for 2023, with a GDP-weighted average of 5.6%. The weighted average GDP growth targets of provinces, municipalities and autonomous regions in 2021 and 2022 are 0.8 percentage points and 0.6 percentage points higher than the national GDP growth targets, respectively. Based on this, it is inferred that the national GDP growth rate in 2023 is about 5%, or above.

One of the priorities of China's economic work in 2023 is to promote the recovery of confidence, and the GDP growth target of more than 5% will help to better promote the improvement of market players and residents' confidence, and we expect that the probability of setting the growth target above 5% is greater. This is also in line with the law of the continuity of annual GDP growth targets, during 2012~2022, except for 2020, which was affected by the epidemic, the growth target for other years was either unchanged from the previous year or lowered by 0.5 percentage points from the previous year, while the national GDP growth target in 2022 was about 5.5%.

Of course, to achieve this target growth rate, it is necessary to focus on expanding domestic demand and smoothing the internal circulation in 2023. In the first three quarters of 2022, net exports of goods and services contributed 32% year-on-year to China's GDP, the highest since 2009. However, in the fourth quarter of 2022, the year-on-year growth rate of China's exports has continued to decline, in addition to directly dragging down the economy, it will also indirectly suppress the economy through manufacturing investment, employment and consumption.

From the year-on-year comparison of the main economic indicators in December 2022, China's domestic demand has been repaired. In December 2022, the service industry production index increased from -1.9% in the previous value to -0.8%, the year-on-year growth rate of fixed asset investment increased from 0.8% in the previous value to 3.1%, the year-on-year growth rate of total retail sales of consumer goods increased from -5.9% in the previous month to -1.8%, and the year-on-year growth rate of imports, which reflected the strength of domestic demand, also rebounded from -10.6% to -7.5%. China's epidemic prevention policy has been adjusted relatively quickly, the Baidu search index of related words such as "fever", "cough" and "new crown" has peaked in late December 2022, and the high-frequency indicator of domestic demand has also improved for three consecutive weeks, and domestic demand will continue to repair as the epidemic improves.

Industrial production weakened Manufacturing investment continued the trend of high prosperity

In December 2022, industrial added value increased by 1.3% year-on-year, compared with 2.2% in the previous month, hitting a new low since June 2022. After the quarterly adjustment, the industrial added value in December 2022 was 0.06% month-on-month, the lowest value in the same period since the data was released in 2011. After weakening industrial production, the production and sales ratio of industrial enterprises showed an ultra-seasonal recovery in December 2022, from 96.4% to 97.7%, compared with an average increase of 0.6 percentage points in the same period of the past four years.

We expect that there are two reasons for the weakening of industrial production in December 2022: First, the increase in the number of new crown infections may affect industrial production and may also cause some employees to return to their hometowns early. From the perspective of the three main categories, the year-on-year decline in industrial added value in December 2022 was mainly dragged down by the manufacturing industry. The manufacturing industry is the main body of industrial employment, and its added value is weakening relatively fast year-on-year, which also reflects the impact of the epidemic. Second, although domestic demand is recovering, but overall domestic demand recovery is still in the early stage, superimposed export delivery value continues to fall year-on-year, industrial enterprise order demand is generally not strong, so enterprises may actively reduce production willingness. Although the production and sales rate of industrial enterprises in December 2022 rebounded rapidly, it was still significantly lower than the same period in recent years, and the overall supply of industrial products was in a pattern of oversupply.

In addition, the year-on-year growth rate of manufacturing investment rebounded in the month, continuing the high boom trend. According to the data of the 13 sub-industries that have announced growth rates, the investment in electrical machinery and equipment manufacturing, non-ferrous metal smelting and rolling industry, general equipment manufacturing and automobile manufacturing industry in December 2022 has a higher year-on-year growth rate. Compared with the previous value, investment in the non-ferrous metal smelting and rolling industry and automobile manufacturing industry in December 2022 rebounded significantly year-on-year.

In 2023, manufacturing investment will face the dual suppression of declining exports and low capacity utilization, and policies need to continue to increase support for manufacturing investment, and stabilize growth in the short term while also helping to optimize supply in the medium and long term. At present, there are two pressures on manufacturing investment: First, high-export-dependent industries will contribute more than half of the increase in manufacturing investment in 2022. As the pressure of slowing exports is further reflected, it may be transmitted to investment in related manufacturing industries; Second, the manufacturing capacity utilization rate fell to 75.8% in the fourth quarter of 2022, 2 percentage points lower than the same period of the previous five years. The resilience of manufacturing investment in the first two years continued to exceed expectations, which will gradually form capacity, so the manufacturing capacity utilization rate may further decline in 2023. We believe that in 2023, we need to continue to play the supporting role of policies in key areas such as green and low-carbon, intelligent manufacturing, autonomous and controllable and automotive industry chain, and release the investment demand for manufacturing transformation and upgrading. The year-on-year growth rate of manufacturing investment rebounded in the month, continuing the high boom trend. According to the data of the 13 sub-industries that have announced growth rates, the investment in electrical machinery and equipment manufacturing, non-ferrous metal smelting and rolling industry, general equipment manufacturing and automobile manufacturing industry in December 2022 has a higher year-on-year growth rate. Compared with the previous value, investment in the non-ferrous metal smelting and rolling industry and automobile manufacturing industry in December 2022 rebounded significantly year-on-year.

The real estate sector improved slightly and retail sales began to recover

In 2022, the real estate industry relief policy continued to fall underground, and real estate-related indicators improved in December. In terms of sales, the year-on-year growth rate of commercial housing sales area and value increased from -33.3% and -32.2% in November 2022 to -31.5% and -27.7% in December, respectively. In terms of investment, the completion of real estate investment, the completed area and the construction area rebounded from -19.9%, -20.2% and -52.6% in November 2022 to -12.2%, -6.6% and -48.3% in December 2022, respectively. In terms of leading indicators, the land area acquired and newly started in the year recovered to -51.7% and -44.3% year-on-year from -58.5% and -50.8% in November 2022, respectively. The overall improvement of real estate-related indicators in December 2022 is due to the low base in the same period of 2021, and secondly, it is related to the gradual effectiveness of the "three arrows" of housing enterprise financing.

Looking ahead to 2023, we expect the drag on China's economy to weaken significantly:

First, under the requirement of "maintaining stability", it is expected that the financing of housing enterprises will continue to improve in 2023. In November 2022, the financing of housing enterprises was "three arrows in unison", which was more pragmatic than the policies introduced in the previous period. In December 2022, the year-on-year growth rate of real estate development funding sources rebounded to -28.7% from -35.4% in the previous value. Among them, the year-on-year growth rate of domestic loans rebounded sharply from -30.5% in the previous value to -5.5%; Under the overall contraction of the primary issuance of credit bonds, according to the statistics of "Clarion", the financing of 100 typical housing enterprises in December 2022 increased by 84% month-on-month, exceeding 100 billion yuan in a single month for the first time this year. The Central Economic Work Conference added the concept of "ensuring stability" in the real estate part, and the core of ensuring stability is "guaranteeing the delivery of buildings", and it is expected that in 2023, it will promote the further improvement of housing enterprise financing around the guarantee of the handover of buildings.

Second, leading indicators suggest that real estate construction will be supported in 2023. In terms of new construction starts, the year-on-year growth rate of land transaction area (12-month moving average) in 100 large and medium-sized cities was about half a year ahead of the year-on-year growth rate of housing new construction area. According to this leading relationship, the year-on-year growth rate of new housing construction area may be near the bottom position. In terms of existing housing projects, historical experience shows that the year-on-year growth rate of newly started area (12MA) is ahead of the year-on-year growth rate of completed area (12MA), but this leading lag relationship disappeared in the third quarter of 2021. This means that since the third quarter of 2021, the area of commercial housing that should have been completed but not actually completed has continued to accumulate. With the improvement of financing of housing enterprises, greater progress has been made in "guaranteeing the delivery of buildings", which will promote the acceleration of construction of existing projects.

In addition, the year-on-year growth rate of total retail sales of consumer goods in December 2022 was -1.8%, a significant improvement from -5.9% in the previous value.

In terms of consumption type, mainly retail sales are rising, and its year-on-year growth rate in the month rebounded from -5.6% in December 2022 to -0.1%; The year-on-year growth rate of catering revenue fell to -14.1% in the month from -8.4% in November 2022, mainly due to the decline in the frequency of residents' outing and consumption during the spread of the epidemic. With the rapid return of the economy to normal, it is expected that the growth rate of catering revenue will pick up rapidly.

In terms of industries, the year-on-year growth rate of total retail sales of enterprises above designated size in most industries in December 2022 rebounded from the previous value. In December 2022, the retail sales of Chinese and Western medicines above designated size increased by 39.8% year-on-year, which was related to the demand for epidemic prevention drugs after the spread of the epidemic. The year-on-year growth rate of retail sales above designated size of automobiles rebounded to 4.6% from -4.2% in November 2022, which may be related to the withdrawal of some automobile sales stimulus policies at the end of the year (such as the halving of the car purchase tax), so that part of the demand was released centrally before the policy exit. In December 2022, the industries with the lower year-on-year growth rate of retail sales above designated size were, first, optional consumption such as cosmetics and jewelry, and second, post-cycle consumer goods such as electrical appliances, audio-visual equipment, building decoration, and furniture. It is expected that with the continuous advancement of the "guaranteed handover building" work, the related decoration demand may drive the improvement of real estate post-cycle consumption.

(Zhong Zhengsheng is Chief Economist of Ping An Securities; Zhang Deli is a senior macro analyst at Ping An Securities)

Author: Zhong Zhengsheng Zhang Deli

Editor: Wang Xiaoxia

Operations Editor: Xiao Ran