Cao Yuanzheng: It is expected that China's economy will enter the normalization process in the fourth quarter Investment needs to be adjusted

On July 15, China's semi-annual economic report was released. How do you view the performance of China's economy in the first half of this year? Will the impetus for economic growth in the first half of the year continue? How will the real estate market go in the second half of the year? How risky is inflation throughout the year? How will fiscal and monetary policy go in the second half of the year? Around these issues, the Beijing News connected Cao Yuanzheng, chairman of BOC International Research Corporation, and Liu Yuanchun, vice president of Chinese Min University, to interpret them.

Cao Yuanzheng said that from the economic data of the first half of the year, China's economy is close to normal growth, but it is still in the process of recovery, and the average growth rate of consumption and investment in two years is still lower than the level before the epidemic. It is expected that this recovery trend will continue in the third quarter, and by the fourth quarter, it will be basically the same as the fourth quarter of 2019 and enter the normalization process.

Economic performance in the first half of the year is in line with expectations It is expected to enter the normalization process in the fourth quarter

According to the preliminary accounting data of the National Bureau of Statistics, in the first half of the year, China's GDP increased by 12.7% year-on-year at comparable prices, down 5.6 percentage points from the first quarter; the average growth rate in two years was 5.3%, and the average growth rate in two years was 0.3 percentage points faster than that in the first quarter.

Cao Yuanzheng said that the economic data for the first half of the year was in line with expectations. From the perspective of the epidemic cycle, the average growth rate of China's economy in the first half of the year reached 5.3% in two years, and the growth rate is gradually increasing quarter by quarter, which shows that China's economy is close to normal growth and has reached the second half of the epidemic cycle. However, China's economy is still in the process of recovery, and the two-year average growth rate of consumption and investment is still lower than the pre-epidemic level, indicating that the recovery process is still continuing, and it is expected to continue this trend in the third quarter. It is expected that by the fourth quarter, it will be basically the same as the fourth quarter of 2019, which means that by the fourth quarter of this year, China's economy will enter the normalization process.

Cao Yuanzheng argues that the structure of China's economic growth is also changing. In the "troika", exports performed well, with China's exports of goods accounting for about 15% of the global share, an increase of 1 percentage point over before the epidemic. In contrast, investment performance was flat and consumption performance was worse than expected. On the whole, the potential hidden dangers of China's economy still exist, and the most important thing is that consumption is still a weakness.

Will exports remain strong in the second half of the year? Cao Yuanzheng believes that exports will grow in the second half of the year, but the growth rate will fall. The global epidemic is under control, especially in developed countries where vaccinations are getting faster than expected and developing country economies are beginning to recover, which will stabilize China's export market. At present, China's export share has accounted for a high share of global exports, and it is unlikely that there will be a larger share of growth in the future, so the future exports will be in a stable and slowing process, and the contribution to China's economy will also weaken.

The weakening of export contributions is also a manifestation of China's return to normal. The contribution of exports to GDP in the past decade has also gradually declined, with China's trade surplus accounting for 9.9% of GDP in 2007, the highest point; then gradually declining, basically returning to 1% in 2018, and now rising again. China proposes to expand domestic demand and expand resident consumption as the core issue, so that resident consumption can become the main contributor to GDP. Correspondingly, there should be positive action on investment, especially in the emerging manufacturing sector, and government investment may also be required.

From the perspective of consumption, Cao Yuanzheng proposed that in the short term, the supply side of the problem is greater than the demand side, with the improvement of residents' income, the demand for service products will be greater than the demand for general consumer goods, the development of the service industry is very important, to provide more and better service products is a very important direction to meet consumption. In the long run, an important way to promote consumption is to increase the income of residents, which requires employment priority policies, adjustment of income distribution policies, and continuous growth of middle-income groups.

Investment needs to be adjusted the focus from real estate to other directions

In the first half of this year, the national fixed asset investment (excluding rural households) increased by 12.6% year-on-year, with an average growth rate of 4.4% in two years; infrastructure investment increased by 2.4% in two years, manufacturing investment increased by an average of 2.0% in two years, and real estate development investment increased by an average of 8.2% in two years.

Cao Yuanzheng proposed that manufacturing, infrastructure and real estate investment have been affected during the epidemic, and at present, the recovery of manufacturing investment is relatively good, real estate has not returned to the situation in 2019, and government infrastructure has not been available, which has led to unsatisfactory investment. The core is to establish a new mechanism, especially whether infrastructure investment still needs to be pulled by the government, whether real estate should be used as an important force for investment, these issues may have to be reconsidered, which involves the structural adjustment of investment and the transformation of kinetic energy. If the global average temperature in 2050 is controlled within 2 degrees Celsius compared with the pre-industrial period, the scale of China's low-carbon investment will reach 100 trillion yuan, and if the global warming is controlled within 1.5 degrees Celsius, the scale of low-carbon investment will reach more than 1.38 trillion yuan. How to take the low-carbon economy as a new development direction, the investment structure and investment direction may change, I hope that macro policies can create a stable environment and adjust the investment structure.

For real estate investment, Cao Yuanzheng believes that real estate is still an important driving force for economic growth, but its importance is weakening. Chinese structure is changing, the seventh census reflects the trend of aging and low birthrate, and the demand for real estate is not very strong in the long run, which also requires the focus of investment to shift from real estate to other directions. On the other hand, real estate is still a very important industry, for the financial industry is also very important, the financial industry about 1/4 of the assets are in real estate, so can not let the real estate transfer too fast, so it is a steady growth process. In the past two years, we have also seen real estate investment maintain growth and the growth rate has decreased. However, the decline in growth rate is a long-term process, and the quarterly change is not very obvious.

It has never been seen that because China's urbanization process has not yet ended, a large number of people are still moving to cities, and there is still a demand for housing. But there may be changes in the way housing is done, for example, rental may become the dominant form of housing in the future, so that the upward trend of house prices will be curbed. New housing demand will grow, new housing construction will meet new housing demand, so real estate investment will still contribute to GDP, but the stimulus effect on house prices is weakening.

Monetary Policy Should Move from Extraordinary Easing to Conventional Easing There is a possibility of tightening fiscal policy

In the first half of the year, the national consumer price (CPI) rose by 0.5% year-on-year; the national industrial producer price (PPI) rose by 5.1% year-on-year, of which June rose 8.8% year-on-year. The rapid rise in the PPI has led to inflation risks that have attracted attention from all sides.

Cao Yuanzheng said that China's CPI is still low, and the PPI is relatively high, indicating that the price transmission mechanism is not smooth, especially the profits of terminal enterprises will be importantly affected. On the other hand, this also reflects that the situation of consumption is not very good.

At present, the market is more concerned about asset prices, and after the outbreak of the epidemic, the monetary policies of various countries are extremely loose, especially in the United States, which has caused a sharp rise in asset prices, and currency issuance has a great transmission effect on asset prices. Now that the epidemic situation has been controlled to a certain extent, the economy is recovering, whether monetary policy is to be withdrawn, and whether the withdrawal of easing policy will lead to fluctuations in asset prices has become a problem of market concern.

Cao Yuanzheng said that the meaning of inflation is currently more complicated. China's CPI will certainly not exceed 3%, PPI is also gradually falling, asset prices are more disturbed by foreign countries. Therefore, if you look at the traditional caliber of inflation, China controls it well, but it is necessary to guard against financial risks.

The deviation of the PPI from the CPI also indicates the problem of insufficient demand, so it is necessary for macroeconomic policies to maintain a relatively loose state. With the epidemic under control, the special anti-epidemic policy must take a turn, but it cannot make a sharp turn, and the monetary policy should move from ultra-conventional easing to conventional easing, and the central bank's 1 trillion yuan RRR cut is also the release of this signal. In fact, the policy after March has continuously released this signal, such as supporting small and micro enterprises to exhaust loans and deferring the repayment of principal and interest until the end of this year. The RRR cut not only increases the loanable funds, but also reduces the cost of loans, which can help small and micro enterprises resist the impact of rising PPI and high costs. Small and micro enterprises are the main creators of employment, and the development and growth of small and micro enterprises will help employment, consumption and investment.

If the Fed raises interest rates, will it affect China's monetary policy? Cao Yuanzheng said that although the CPI in the United States is currently high, the rise in CPI can be hedged by imports. Over the past few decades, the income of U.S. residents has not risen much, but consumption has continued to expand, imports have also grown, and inflation has remained low despite loose monetary policy. Crucially, lower interest rates support debt consumption, and if the US rate hikes will not burst this bubble? It remains to be seen that the Fed has not shown a clear stance at this time.

From China's point of view, China's monetary policy is basically unchanged, and is still developing in the direction of lower interest rates to support the real economy, which is right, the real economy can create an environment for financial development, and cannot blindly look at whether interest rates should be raised from a financial point of view.

Regarding fiscal policy, Cao Yuanzheng proposed that China's fiscal policy has the possibility of tightening. The main reason is local government debt, which is under increasing pressure and the ability to expand investment with debt expansion is weakening. Local governments are also under pressure to pay interest, and last year we began to see many local government financing platforms default. Local governments should balance their revenues and expenditures, meet the requirements for interest payments, and maintain financial stability.

Beijing News shell financial reporter Gu Zhijuan Hou Runfang Editor Chen Li Proofreader Wei Zhuo