The economic boom continued to decline in May, and market recovery still requires reform of the distribution system

Executive Summary:

The economic indicators that diverged from March to April showed initial convergence in May: they fell into contraction together;

2. In the global economy, our economic boom contraction is more obvious;

3. Lack of orders and insufficient demand are the main reasons for the continuous decline in the economic boom in May;

4. Other high-frequency economic indicators point to insufficient demand dragging down economic recovery;

5. The main problem facing the macroeconomy stems from the weakening of endogenous power caused by the distribution mechanism, and demand cannot promote sustained economic recovery.

First, the economic indicators that diverged in March-April showed an initial convergence in May: a common contraction

According to the purchasing managers' index (PMI) released by the National Bureau of Statistics on May 31, the May Day Golden Week did not bring about a continuation of the economic recovery, and the divergent economic indicators in March and April showed a preliminary convergence in May. But instead of expanding in both directions, they fall into contraction together.

In May, China's composite PMI output index was 52.9%, down 1.5 percentage points from April, although it continued to remain in the boom range, but production and operation generally continued the contraction trend that began in April.

The manufacturing PMI was 48.8%, down 0.4 percentage points from the previous month and below the 50% tipping point. As the saying goes, there are only three things, but this is the third consecutive month of the manufacturing PMI decline, and the second month is in the contraction range, indicating that the momentum of the manufacturing recovery has basically disappeared.

The non-manufacturing PMI was 54.5%, down 1.9 percentage points from April, and the second month that the sentiment fell back. Although it is still above the tipping point, it means that after the removal of masks and the temporary release of backlog of commercial and service consumption, there is a lack of momentum to continue to support consumption expansion.

By industry, the construction PMI was 58.2%, down 5.7 percentage points from the previous month. During the 3-year mask period, the construction industry has been a undertaking industry that underpins the economy with advanced investment. However, the investment momentum dominated by state-owned capital has been challenged because the debt ratio is already on the verge of risk, and the frequent red lights of urban investment bonds in various places are already warning of the unsustainability of advanced investment, and the construction industry will face a large contraction gap in the future.

The services PMI was 53.8%, down 1.3 percentage points from the previous month. From the perspective of specific industries, the business activity index of railway transportation, water transportation, air transportation, telecommunications, radio and television and satellite transmission services, Internet software and information technology services, which are highly nationalized and lack competition, are in the high economic range of more than 60.0%. The highly market-oriented business activity index of capital market services, real estate and other industries has fallen below the critical point.

Second, in the global economy, our economic boom contraction is relatively obvious

Judging from the countries that have released PMI data for May, the economic performance in most countries has generally picked up. Only the eurozone and our manufacturing and non-manufacturing PMIs fell in both directions. But the eurozone has fallen less sharply than we do.

In May, the Eurozone's manufacturing PMI fell to 44.6% from 45.8% the previous month, the services PMI fell from 56.2% to 55.9%, down 0.8 and 0.3 percentage points, respectively, and the composite PMI fell by 0.5 percentage points. However, our manufacturing and non-manufacturing PMIs fell by 0.4 and 1.9 percentage points, respectively, and our composite PMI fell by 1.5 percentage points.

In May, the manufacturing and service PMIs of Japan and India both showed an upward expansion trend. Japan's manufacturing PMI rose to 50.8% from 49.5% last month, and the services PMI rose to 56.3% from 55.4% last month; India's manufacturing PMI rose to 57.4% from 57.2% expected in April, and the services PMI rose to 62.1% from 62% expected last month.

In May, the economic sentiment index of the United Kingdom and the United States was mixed, but the overall upward trend was expansionary. The US S&P manufacturing PMI fell to 48.5% from 50.4% last month, but the services PMI rose to 55.1% from 53.7% last month; The UK manufacturing PMI recovered sharply to 55.1% from 47.8% last month, but the services PMI eased slightly to 55.1% from 55.9% last month. Both the US and UK composite PMIs were above the 50% wilt line for the fourth month in a row.

From the perspective of PMI performance in Europe and the United States, it has experienced many rounds of sharp interest rate hikes since last year, and in the continuous contraction of monetary policy, the European and American economies have actually not experienced a recession and shrinking demand as we have seen in the media, but have grown steadily under the pull of strong internal demand. After the momentum of the US dollar interest rate hike has basically disappeared and the euro area has also entered the end of interest rate hikes, it is believed that the economic boom in Europe and the United States will maintain continued expansion and prosperity.

Third, the lack of orders and insufficient demand are the main reasons for the continuous decline in the economic boom in May

After the cancellation of masks without warning in early December 2022, the rapid recovery of economic PMI data continued to rise for 3 months and then could not be sustained, why did it turn downward?

This is also what I have been emphasizing when studying the PMI data from January to March, the sudden increase in outdoor traffic and the sudden increase in customers we saw at that time were not the consumption demand naturally released after the increase in income, but the short-term release of necessary consumption accumulated for three years due to the limitation of the consumption scene of the mask problem. Once the backlog of demand is released, demand quickly cools down.

First, the index of new orders in manufacturing and non-manufacturing industries continued to fall, indicating that market demand continued to contract.

From the perspective of manufacturing, the new orders index in May was 48.3%, down 0.5 percentage points from April and 5.8 percentage points from February. Among them, new export orders also continued to fall from 52.4% in February to 47.2% in May. This shows that the domestic market and overseas market demand of the manufacturing industry continue to contract.

From the perspective of non-manufacturing, the new orders index in May was 49.5%, down 6.5 percentage points from April and 7.8 percentage points from March. Among them, new export orders also continued to fall from 64.9% in February to 60.4% in May.

Second, the lack of demand is also reflected in the continuous decline in prices.

In May, the raw material input price index of the manufacturing industry in the PMI index was 47.4%, down 3.7 percentage points from the previous month, below the critical point, indicating that the overall level of input prices used by non-manufacturing enterprises for business activities turned from rising to falling. By industry, the input price index of the construction industry was 44.7%, down 3.4 percentage points from the previous month; the input price index of the service industry was 47.9%, down 3.8 percentage points from the previous month.

Due to the decline in the company's own orders, the procurement demand has decreased, and the insufficient demand at the enterprise level has led to a continuous decline in the purchase price. It slipped to 40.8% from 54.4% in February, a cumulative decline of 13.6 percentage points in three months, and the price of non-manufacturing inputs fell by 4.1 percentage points from 51.5% in January to 47.4%.

The lack of productive demand of enterprises stems from the contraction of domestic and overseas market demand, which has triggered a decline in the sales price of enterprises. The ex-factory price index in the manufacturing PMI fell all the way to 41.6% in May from 51.2% in February, down 9.6 percentage points in three months; the non-manufacturing sales price index fell by 3.2 percentage points from 50.8% in February.

By industry, the sales price index of the construction industry was 46.9%, down 4.6 percentage points from April; the sales price index of the service industry was 47.8%, down 2.3 percentage points from April.

Fourth, other high-frequency economic indicators point to insufficient demand as a drag on economic recovery

High-frequency data in May showed that in addition to the increase in the decline in automobile prices affected by the government's stimulus policies, other high-frequency data related to infrastructure, real estate and consumption all pointed to the economic performance of insufficient demand and falling prices.

On May 24, the latest passenger car sales data officially released by the Passenger Car Association showed that retail sales in the domestic passenger car market in the first three weeks of May increased by 41% year-on-year and 10% month-on-month. Wholesale sales of passenger car manufacturers increased 32% y/y and 10% m/m. Let's take a look together.

Real estate data released by the China Index Research Institute on May 26 showed that in the first three weeks of May, the average weekly transaction of new commercial housing in 50 cities in China was 4.34 million square meters, down 17.7% from April. Monitoring data from Zhuge Data Research Center also shows that from May 1 to 21, 48,097 sets of second-hand residential buildings in key 10 cities were transacted, down 21.63% from the same period in April.

House prices are also cooling. According to monitoring data from the Real Estate Professional Committee of the Urban Economics Association of China, housing prices in four first-tier cities all showed a correction in the first half of May 2023. Among them, Shanghai house prices fell 0.68% in the first half of the month, Beijing fell 0.34%, Guangzhou fell 0.52%, and Shenzhen fell 0.11%. In addition, house prices in 85 other Tier 2-4 cities fell in the first half of May.

Cement shipments and steel shipments, which are highly related to the construction industry, also showed a year-on-year and month-on-month decline in the first three weeks of May.

In mid-May, rebar prices fell 0.6% month-on-month and 23.2% year-on-year; Wire prices decreased by 0.8% month-on-month and 22.8% year-on-year; Cement (bulk) prices decreased 8.1% month-on-month and 17.7% year-on-year. This shows that the demand for infrastructure, real estate development and fixed assets in May is continuing the downward trend of contraction from March to April.

Fifth, the main problems facing the macroeconomy stem from the weakening of endogenous driving forces caused by the distribution mechanism, and demand cannot promote sustained economic recovery

There is a very strange phenomenon, that is, whenever the economy is down, a large number of experts, scholars, and media either call for more investment to stimulate the economy, or call for saving the property market is to save the economy.

These so-called experts and scholars either do not learn or have no skills, or they are hiding their selfish intentions. Because China's current economic difficulties are originally caused by long-term overinvestment, continuous speculation in real estate, and long-term suppression of consumption. We have been glutinizing with a full printing machine for a long time, regardless of the size of the economy's stomach or its ability to digest and absorb. Now that you are eating, eating bursting, eating out of stomach disease, and still recommending more feeding, aren't you afraid of eating stomach cancer?

Our economy is still in a precarious recovery process. On the surface, it is the decline in export orders and the slow recovery of domestic demand brought about by the transfer of industrial chains and supply chain adjustments in developed countries, especially the lack of demand for commodities. However, the root cause is still the distribution mechanism established by us according to the economic development model of advanced investment, which suppresses the proportion of labor income in the total amount of national income, and the proportion of groups that grasp the right to distribute cakes from the structural point of view is increasing, and the proportion of pure working class is getting smaller and smaller, resulting in the continuous widening of income gap and the smaller and smaller momentum of demand growth.

As we all know, increasing income for the high-income class will only increase the investment capacity, and increasing the income of the low- and middle-income class will stimulate consumption. However, when the distribution system has not been reformed and the social security system has not yet been perfected, continuing to increase investment and stimulate real estate can only continue to widen the gap between the rich and the poor, push up debt risks, and increase the burden of macroeconomic development.

In 2022, the per capita monthly disposable income of residents in the country will be 3,100 yuan, but 600 million of them will have a monthly income of less than 1,000 yuan. We must realize that, on the one hand, the low proportion of workers' income in national income is the main reason why supply exceeds consumption, resulting in oversupply; On the other hand, the consumption rate decreases with rising income. The widening income gap means a decline in the overall consumption rate. To stimulate consumption, we must not only reduce the proportion of investment, increase the total income of workers, but also focus on increasing the income of the low- and middle-income class, which is the focus of stimulating consumption.

Therefore, to repair the problem of weakening the endogenous driving force of economic development and promote sustained economic recovery, our correct policy choice should be:

First, adjust the distribution mechanism, reform the national income distribution system, and effectively increase the proportion of workers' income in GDP.

Second, adjust and improve the social security system, expand social security coverage, and narrow the social insurance gap among retired groups.

Third, before Articles 1 and 2 are in place, half of the state-owned capital planned for investment should be distributed equally to the people of the whole country.

【Author:Xu Saburō】