Luo Zhiheng is the Chief Economist and Dean of the Research Institute of Yuekai Securities, and a director of the China Chief Economist Forum
Guide
1. To observe the short-term economic situation, it is necessary to look at both month-on-month and month-on-month data; macroeconomic indicators as well as fiscal, financial, and micro-corroborated indicators; it is necessary to look at the data itself as well as the base effect; it is necessary to look at both the internal situation and the impact of the external situation on the mainland; and it is necessary to look at both the current and future trends. In the absence of exogenous shocks, the economy is generally continuous.
The economic data from January to February got off to a good start, and then the PMI data in March exceeded expectations again, and the GDP in the first quarter increased by 5.3% year-on-year, performing well. However, the year-on-year data of major economic indicators in March fell from January to February. How to understand the decline in March and the unexpected in the first quarter? What is the real situation of the current economic situation?
At the same time, the macro data in the first quarter showed a "triple divergence": one is the divergence between the real growth rate and the nominal growth rate, the second is the divergence between the macro data and the micro high-frequency indicators, and the third is the divergence between the economic data and the financial data. In general, the statistical indicators can verify each other, but the structural differentiation leads to superficial divergence.
This paper will focus on the analysis of the above problems, including the disturbance of the base effect and the differentiation and dislocation caused by the structural recovery of the economy. It is necessary to see that the economy in the first quarter was realized from a relatively high base in the first quarter of last year, and that the economy is indeed recovering, but also that the recovery is uneven, enterprises and employment in the real estate related chain are still affected, and local governments are still facing problems such as land finance and interest payment pressure. It is necessary to see both hope and the uncertainty and unevenness ahead.
2. On the whole, China's economy continued to recover in the first quarter, mainly reflected in the improvement of supply and demand, and the business expectation index in the PMI data improved, reflecting the gradual recovery of the confidence of micro entities. From the perspective of industrial structure, the steady progress of high-quality development and the sustained development of new quality productivity are mainly reflected in the development of high-tech industries, the added value of high-tech manufacturing above designated size and the investment in high-tech industries have maintained rapid growth, and the competitiveness of the "new three" in exports is relatively strong. From the perspective of demand structure, it is mainly driven by service consumption, high-end manufacturing investment and infrastructure investment.
China's economic rebound is mainly due to three aspects: First, as a large economy, it has very distinctive characteristics, that is, strong resilience, long industrial chains, and obvious advantages in economies of scale; second, the transformation and upgrading of traditional industries and high-tech industries such as new energy industries have developed rapidly, and their export competitiveness is strong, and at the same time they have promoted the investment in manufacturing industry to maintain a relatively high growth rate; third, fiscal and monetary policies have continued to take effect, and the keynote of this year's fiscal policy is to "improve quality and efficiency" As a result, the fiscal policy is both active and sustainable, and the 1 trillion yuan special treasury bond will continue to play a role in expanding aggregate demand and optimizing the supply structure.
3. Of course, the economy is still facing some hidden worries that need to be solved urgently: real estate is still in the period of transformation and adjustment, the pressure on interest payment after the debt is still large, and the transformation of urban investment companies has a long way to go, the capacity utilization rate is declining, the low price price has affected corporate profits and fiscal revenues, and the growth rate of residents' property income is low.
It is necessary to further increase the coordination and implementation of fiscal and monetary policies, especially to prevent the policy contraction after the "bright" economic data in the first quarter, continue to maintain the stability and continuity of the policy, and it is necessary to continue to optimize and increase the policy to stabilize the real estate situation.
Risk warning: exports fell more than expected, and the real estate market was sluggish more than expected
directory
1. How to understand the overall performance of economic data in the first quarter?
(1) GDP in the first quarter is actually high growth on a high base
(2) The decline in economic data in March was mainly due to the disturbance of the base effect
2. How to understand the "triple divergence" in macro data?
(1) The divergence between the real growth rate and the nominal growth rate: Why do prices continue to be sluggish?
(2) Divergence between macro data and micro inference: why does infrastructure investment exceed expectations?
(3) Divergence between economic data and financial data: Why is credit union financing weak?
3. How to better promote the next stage of economic development?
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1. How to understand the overall performance of economic data in the first quarter?
On the one hand, GDP grew by 5.3% year-on-year in the first quarter, higher than the market expectation of 4.9% and 5.2% in the fourth quarter of last year, indicating that the economy has accelerated its recovery and achieved a "good start"; on the other hand, the data on industrial production, consumption and exports in March not only fell sharply from January to February, from 7%, 5.5% and 7.1% to 4.5%, 3.1% and -7.5% respectively, but also significantly lower than the market expectations of 5.3% and 4.8% and -2.1%.
(1) GDP in the first quarter is actually high growth on a high base
Some might attribute the high GDP growth in the first quarter to the low base in the same period last year, with GDP in 2023 being 4.5%, 6.3%, 4.9% and 5.2% year-on-year, respectively. However, in fact, the first quarter of last year was a high base, with GDP growth of 21.0%, 19.2%, 20.2% and 20.1% in each quarter of 2023 compared to the same period in 2019, respectively. In the first quarter of this year, GDP grew by 1.6% quarter-on-quarter, significantly faster than 1.2% in the fourth quarter of last year, continuing to pick up and improve.
The high GDP growth in the first quarter can also be verified by other data. 1) In terms of production method, the increase in demand driven by the improvement of exports and a series of domestic policies to stabilize growth led to a recovery in demand, with the added value of industrial enterprises above designated size increasing by 6.1% in the first quarter, and the enthusiasm of residents' service consumption was high, with the production index of the service industry increasing by 5.5% in the first quarter. "Both industry and services contribute more than 90% to GDP growth," the NBS press conference said. 2) In the first quarter, investment in fixed assets increased by 4.5 percent in nominal terms and 5.9 percent in real terms, retail sales of goods and services increased by 4.7 percent, and exports denominated in RMB increased by 5 percent, roughly matching the overall economic growth rate.
(2) The decline in economic data in March was mainly due to the disturbance of the base effect
From January to February 2023, the economic recovery was dragged down by the large-scale infection of the Omicron variant in China, and the base was low, while in March, it benefited from the concentrated release of pent-up demand in the early stage, forming a high base.
Regarding the disturbance of base effects, the export data is the most typical. The two-year average growth rate of exports from January to February 2023 was 2.7%, surging to 12.1% in March before falling back to 4.7% in April. Correspondingly, exports grew by 7.1% in January-February this year, fell sharply to -7.5% in March, and are expected to pick up again in April. Perhaps the manufacturing PMI new export orders index rose sharply to 51.3% in March from the previous value of 46.3%, resulting in the market's expectations for March exports are too high, and then form a psychological gap. In fact, exports in March are not bad, with a two-year average growth rate of 1.3% higher than -0.9% in January-February;
On a month-on-month basis, the economy continued to pick up in March. From January to March, the month-on-month growth rates of total retail sales of consumer goods were 0.03%, 0.01% and 0.26%, respectively, and accelerated significantly in March. The National Bureau of Statistics said at a press conference: "In order to maintain the month-on-month and year-on-year comparisons between last year and this year, the added value of industries above designated size, according to estimates, is 6.3% higher than that of January and February in March, when converted into the added value created by each working day." ”
2. How to understand the "triple divergence" in macro data?
Although the economy continued to rebound in the first quarter and got off to a good start, it should also be clearly seen that the current economy is a structural recovery with significant differentiation, and some industries and groups are experiencing the pain of structural transformation. Correspondingly, there is a "triple divergence" in macro data: one is the divergence between the real growth rate and the nominal growth rate, the second is the divergence between the macro data and the micro inference, and the third is the divergence between the economic data and the financial data.
(1) The divergence between the real growth rate and the nominal growth rate: Why do prices continue to be sluggish?
Real GDP grew by 5.3% year-on-year in the first quarter, but nominal GDP grew by only 4.2% year-on-year, which was significantly lower than the real growth rate. Moreover, the real GDP growth rate in the first quarter was 0.1 percentage points faster than that in the fourth quarter of last year, but the nominal growth rate was only flat. The nominal growth rate of the economy is not as good as the actual growth rate, which is an important reason why the micro feeling is weaker than the macro data and the confidence of the micro subjects still needs to be boosted.
The nominal growth rate was lower than the real growth rate, mainly due to the low price level. The GDP deflator for the first quarter was -1.1%, while the CPI and PPI were 0% and -2.7% year-on-year, respectively. The sustained economic recovery and the continued low prices coexist due to the structural recovery of the economy.
From the perspective of domestic demand, the economic recovery is mainly driven by service consumption, high-end manufacturing investment and infrastructure investment, real estate investment is the main drag, and commodity consumption still needs to be boosted, resulting in price differentiation. 1) In the CPI, the prices of services and consumer goods in March were 0.8% and -0.4% year-on-year, respectively, and the prices of travel, communication and transportation were 6%, -2.4% and -4.6% year-on-year, respectively. The pull on prices caused by the strong consumption of services is difficult to fully hedge against the sluggish consumption of goods. 2) In the PPI, with the increase in domestic travel demand and the rapid development of artificial intelligence, new energy vehicles and other industries, the prices of oil and gas extraction and non-ferrous metal smelting in March were 6.3% and 0.6% year-on-year respectively, but the prices of coal mining, non-metallic mineral products and ferrous metal smelting in March were -15%, -8.1% and -7.2% year-on-year respectively, which pushed down the overall PPI.
From the perspective of domestic supply, some industries are facing short-term imbalances between supply and demand. 1) The food supply represented by live pigs is relatively sufficient, and the CPI food sub-item in March was -2.7% year-on-year. 2) Some emerging industries have entered a period of rapid expansion, and the increase in production capacity has exceeded market expansion, such as the intensive price reduction of new energy vehicles to compete for market share; 3) The sharp expansion of overseas demand during the epidemic and the transfer of orders caused by supply chain bottlenecks have digested a considerable part of domestic production capacity, but with the decline in overseas demand and the fading of the "supply substitution dividend", domestic demand has not been effectively continued. In short, production is better than demand, production increases but prices fall.
(2) Divergence between macro data and micro inference: why does infrastructure investment exceed expectations?
Macro is the organic sum of the micro, and it is a common analysis method to judge the macro situation from the micro perspective, but there was a deviation in the application of infrastructure investment in the first quarter of this year.
Previously, some institutions had low expectations for infrastructure investment in the first quarter, based on two reasons: first, local governments were constrained by the tight balance between debt and finance, and some provinces with high debt risk were restricted in infrastructure investment, and land transfer income fell sharply due to the downturn in the real estate market;
However, broad infrastructure investment reached 8.8% year-on-year in the first quarter, 0.6 percentage points faster than the 8.2% for the whole of last year, mainly driven by investment in electricity, railways and water conservancy. Driven by the development of high-power industries such as artificial intelligence and new energy vehicles, as well as the green transformation of the energy industry itself, the investment in the production and supply of electric heating and water increased by 29.1% year-on-year in the first quarter, and the Ministry of Transport said at the 2024 China Railway Group Work Conference held on January 9 that the railway infrastructure investment should be moderately advanced in 2024, and the railway transportation industry increased by 17.6% year-on-year in the first quarter; Water conservancy construction was the key investment area of the additional 1 trillion yuan of treasury bonds issued in the fourth quarter of last year, and the investment in water conservancy management increased by 13.9 percent year-on-year in the first quarter. In contrast, investment in the public facilities management industry, which mainly relies on local fiscal funds, is indeed relatively sluggish, with a year-on-year increase of -2.4% in the first quarter.
In the future, with the acceleration of the issuance and use of local special bonds, the issuance and use of 1 trillion ultra-long-term special treasury bonds, and the accelerated implementation of major projects in the "14th Five-Year Plan", infrastructure investment may be further accelerated to promote the economic recovery.
(3) Divergence between economic data and financial data: Why is credit union financing weak?
Finance is the blood of the real economy. However, in March, the stock of social financing and RMB loans were 8.7% and 9.2% year-on-year, respectively, down significantly from 9.5% and 10.4% at the end of 2023, and the new social financing in the first quarter increased by 1.6 trillion yuan year-on-year, and the new RMB loans increased by 1.1 trillion yuan year-on-year.
The mismatch between the decline in credit data and the rebound in economic data is mainly due to the structural changes of financing entities. The current economic recovery is mainly driven by the service sector and the emerging manufacturing industry, whose demand for credit and ease of financing are significantly weaker than those of real estate companies and local governments and financing platforms, which are currently constrained by the market downturn and the policy of reducing debt. In addition, the slow progress of the issuance of local special bonds will also drag down social finance, and the new government bonds in the first quarter increased by 470.9 billion yuan year-on-year.
Financial regulation also has an impact on social finance data. The first is to revitalize the stock of funds and improve the efficiency of the use of funds; the second is to strengthen the balanced allocation of loans and moderately smooth out credit fluctuations; and the third is to strengthen the monitoring and prevention of the idling of funds, which will affect the net growth of credit cooperatives. In the "Monetary Policy Implementation Report for the Third Quarter of 2023", the central bank reminded: "To measure the effectiveness of credit support for the real economy, it is not appropriate to pay too much attention to new loans, and avoid excessive interpretation of high-frequency data such as monthly increments." ”
3. How to better promote the next stage of economic development?
At present, the economy is still facing some hidden worries that need to be solved urgently, and it is necessary to further increase the coordination and implementation of fiscal and monetary policies, especially to prevent policy contraction after the "bright" economic data in the first quarter, and continue to maintain the stability and continuity of policies. Fiscal policy should continue to implement structural tax cuts and fee reductions, accelerate the pace of bond issuance in the second quarter, and at the same time make timely adjustments to decide whether to increase the budget in light of changes in the situation to cope with uncertain external shocks.
First, real estate is still the main force dragging down the current economic situation, excluding real estate investment in fixed assets, private investment growth is much higher than the overall, which means that the negative effect of real estate investment is very obvious. At present, the real estate market is still in a period of adjustment and transformation, with the reversal of the supply and demand situation, the risk of some real estate companies, the downward pressure on housing prices, and the restrictive measures in some cities still existing, resulting in sluggish demand, which affects the normal collection and cash flow of the industry. It is necessary to further stabilize the real estate situation through measures such as ensuring supply, promoting demand, and stabilizing housing prices.
First, to meet the reasonable needs of real estate financing, the cash flow problems of real estate enterprises caused by industry problems can be appropriately rescued and supported, to prevent systemic risks, and the problems caused by non-compliance and their own reckless operation should be dealt with according to the principle of marketization and rule of law, so as to minimize the impact of real estate enterprises' insurance on demand, and appropriately adjust the assessment indicators of financial institutions to avoid a hard landing of real estate thunderstorms. Second, the real estate restrictions introduced in the non-core areas of first-tier cities during the overheating period will be relaxed or even gradually abolished, and more precise regulation and control will be made on a district-by-district basis to release potential demand. Third, according to the number of years of social security payment, some housing purchase qualification indicators will be released to boost demand. Fourth, reduce the cost of buying a house in each link, such as increasing the range of mortgage interest deduction and reducing taxes and fees in the transaction link. Fifth, high-quality commercial housing will be launched in the core areas of first-tier cities.
Second, the package of bonds has achieved positive results, but some regions are facing greater pressure to pay interest in the context of tighter financing, the lack of support from local governments and resource endowments in the transformation of urban investment, and the possibility of a subsequent decline in government investment. On the one hand, the provincial government can coordinate the issue of interest payment and support the district and county governments to continue to revitalize assets and resources, and on the other hand, strictly control the adjustment of new government investment projects from the province to the city, so as to stimulate the enthusiasm of some cities with investment benefits and potential.
Third, exports generally exceeded expectations, but uncertainties caused by global election years and geopolitical factors still exist, and foreign trade and foreign investment should be further stabilized.
Fourth, the capacity utilization rate has declined, and the overcapacity and insufficient demand in some industries have caused the continued low prices, which is not conducive to the increase of income and profits of enterprises. The industrial capacity utilization rate in the first quarter has dropped to the level of the third quarter of 2016 (except for the concentrated outbreak of the epidemic in the first quarter of 2020), mainly in the automobile manufacturing industry, electrical machinery and equipment manufacturing industry, non-metallic mineral products industry, and ferrous metal smelting and processing industry, which decreased by 7.1, 3.1, 1.9 and 0.8 percentage points respectively over the same period last year. It is necessary to coordinate the expansion of effective demand and supply-side structural reforms, eliminate backward excess capacity, increase the proportion of advanced production capacity, and promote the balance between supply and demand.
Fifth, judging from the structure of residents' income, it is mainly wage income and operating income that are contributing, and the growth rate of property income and transfer income is on the low side, so it is necessary to further stabilize the capital market and the real estate market and increase residents' property income.