Lian Ping: Raise the annual GDP growth forecast to about 5.3% How will the macro economy operate after the second quarter?

Lian Ping, President and Chief Economist of Guangkai Chief Industry Research Institute, Chairman of China Chief Economist Forum

Guangkai Chief Industry Research Institute

Key takeaways

In the first quarter of 2024, with the concerted efforts of macroeconomic policies, China's economy has achieved a "good start", showing a trend of stability and improvement. After entering the second quarter, what new changes will the world economy usher in? When will the Federal Reserve start cutting interest rates? How will the domestic fiscal and monetary policies be further precise? What structural changes will occur in the contribution of the "troika" to growth? Is there any hope that the real estate market will stabilize? Will the renminbi appreciate or depreciate? Can China's economy continue to deliver a brilliant report card?...... In view of the above problems, this paper puts forward a ten-point outlook and eight suggestions for economic operation after the second quarter.

[Outlook 1: The Fed's interest rate cut expectations affect the international economic environment] In the second quarter, the complexity and uncertainty of the international economic environment will continue. First, the Fed's interest rate cut may be delayed. Driven by factors such as faster-than-expected economic growth in the United States and a slowdown in inflation, the Fed may delay and weaken the rate cut at the end of the second quarter, which was widely expected. Second, the volatility of the international financial market has intensified. U.S. Treasury yields have rebounded, and U.S. stocks may face the risk of a correction; the U.S. dollar index will be strongly supported, and non-U.S. currencies will continue to be under pressure; and the short-term correction pressure on gold prices has increased, but there is still a possibility of a rebound in the medium term. Third, cross-border capital will gradually flow back to emerging markets. In particular, emerging markets in Asia will see more significant net inflows.

[Outlook 2: Fiscal efforts focus on local special bonds and ultra-long-term special treasury bonds] From the perspective of fiscal policy progress in the first quarter, "moderate strengthening, quality and efficiency improvement" are more fully reflected. In the second quarter, the fiscal policy will take multiple measures to maintain reasonable expansion efforts, implement structural tax and fee reduction policies, increase support for industrial transformation and upgrading, and increase spending in the field of people's livelihood. The most noteworthy thing is that the pace of local government bond issuance has been accelerated and the issuance of 1 trillion yuan of ultra-long-term special treasury bonds has been launched in a timely manner. It is expected that the issuance of local government bonds, especially new special bonds, is expected to accelerate in April and May. Judging from historical experience, it is quite possible that the issuance of special treasury bonds will be carried out in the third quarter, but it cannot be ruled out that in order to form a physical workload as soon as possible, the issuance will be carried out at the end of the second quarter.

[Outlook 3: Monetary policy will be further stable and loose] In the first quarter, monetary policy played a good role in the dual functions of aggregate and structure, releasing a series of looser policy signals that exceeded expectations. In the second quarter and the second half of the year, the orientation of monetary policy will remain steady and loose, and continue to create a favorable monetary and financial environment for the economic recovery. It is not ruled out that the second RRR cut may be mainly targeted in the second quarter or the second half of the year; there is room for MLF to drop by 10-20bp, and the LPR may still be lowered accordingly; comprehensive use of structural monetary policy tools such as scientific and technological innovation and technological transformation and re-lending to strengthen guidance and incentives for financial institutions; strengthen coordination and cooperation with fiscal policies to ensure the smooth issuance of government bonds.

【Outlook 4: Annual GDP may be higher than the established growth target】With the continuous recovery of the economy leading to the improvement of employment conditions and the increase of consumption scenarios, domestic demand continues to pick up and continues to promote the recovery of consumption; driven by the rapid growth of infrastructure investment and manufacturing investment and the stabilization and rebound of real estate investment, investment will continue to play a role in "stable growth" and accelerate its contribution to GDP; the improvement of external demand, the advantages of the whole industrial chain and the continuous promotion of the transformation and upgrading of the export structure will make exports continue to perform well. GDP growth is expected to be around 4.5% in the second quarter. With the strong impetus of the continuous implementation of relevant policies, there is still room for economic growth in the next three quarters to be repaired beyond expectations. Final consumption is expected to grow by 7.4% in 2024, contributing about 50% to GDP, capital formation to grow by 3.8% and contributing about 35% to GDP, and net exports to 2% to GDP to contribute about 15%. GDP grew by about 5.3% for the whole year.

After the second quarter, infrastructure investment and manufacturing investment will maintain a high growth rate, and the decline in real estate investment will narrow, jointly promoting the rapid growth of fixed asset investment. With the continuous release of demand for technological transformation investment, the improvement of the operating conditions of private enterprises, the recovery of external demand, the resonance of the Sino-US inventory replenishment cycle, and the strong support of policies and funds, manufacturing investment can still maintain rapid growth, with the growth rate exceeding the pre-epidemic level, and the role of stabilizing growth has been strengthened. It is estimated that fixed asset investment will increase by 4.5 percent in the second quarter, of which infrastructure investment will increase by 7 percent and manufacturing investment will increase by 9.5 percent, and fixed asset investment will increase by 6 percent for the whole year, of which infrastructure investment and manufacturing investment will increase by 7 percent and 10 percent respectively.

After the second quarter, consumption will continue to maintain a steady and rapid growth trend under the effect of factors such as the gradual improvement of the employment situation, the steady growth of residents' income, the recovery of related consumption driven by the stabilization of real estate, the strong sales of automobiles, the rapid growth of service consumption, and the increase in consumer goods prices driven by the recovery of CPI and PPI. It is expected that in the second quarter, the company will grow by 4%. The trade-in policy for consumer goods will play a positive role. The total of automobiles and home appliances is expected to bring about 350 billion to 400 billion yuan of consumption increment, driving the year-on-year growth rate of total retail sales of consumer goods to increase by 0.7 percentage points to 6.2% in 2024.

[Outlook 7: The contribution of net exports to economic growth turns positive] After the second quarter, export growth is expected to exceed expectations. External demand as a whole is still picking up. Under the cyclical recovery of real estate and the start of the replenishment cycle, the momentum of the recovery of the U.S. manufacturing industry has strengthened, and the demand from emerging countries is still relatively strong. From an internal point of view, the advantages of the whole industrial chain, strong production capacity, optimization of export structure and low base also support exports. The growth rate of imports rose slightly. Domestic demand was generally stable, consumption recovered steadily, and infrastructure investment and manufacturing investment maintained rapid growth. With the steady recovery of the economy and the advancement of the mainland's insistence on expanding imports, demand may recover further than in 2023. In dollar terms, exports are expected to grow by 3 percent and imports by 1 percent in the second quarter, while exports are expected to grow by 2.5 percent and imports by 0.5 percent for the full year.

In the first quarter, the real estate market is still in the stage of grinding the bottom, the risks of real estate enterprises are still worrying, the growth rate of housing credit and non-bank off-balance sheet financing continues to decline, the land market is shrinking, and the decline in real estate investment is difficult to change. Looking forward to the second quarter, the high base factor will gradually fade, and the housing support policy will be further implemented and effective, promoting the marginal improvement of major indicators such as real estate sales and new construction. The land auctions in the first-tier and key second-tier cities have warmed, the construction projects of the "three major projects" have been accelerated, and the debt repayment pressure of real estate enterprises has been reduced. It is estimated that real estate development investment in the second quarter will decline by about 9% year-on-year, a decrease of 0.5 percentage points from the end of the first quarter.

[Outlook 9: The price level is expected to gradually recover] In the first quarter, the overall price level is still running at a low level, and the tail factor dragged down the CPI slightly, and the PPI was dragged down by the lower prices of real estate-related building materials. In the second quarter, the price level is expected to gradually rise from the low. The tail factor will help the CPI to rebound, with food prices stabilizing and non-food prices continuing to rise. PPI declines are expected to narrow. Low base factors and higher crude oil and base metal import prices were the key factors driving the PPI higher. It is expected that by the end of the second quarter, the cumulative CPI will rise to 0.3% year-on-year, the cumulative PPI will rise to -1.5% year-on-year, and the high price scissors difference (CPI-PPI) will fall back to 1.8%, and the pressure on lower prices will be reduced.

【Outlook 10: The RMB exchange rate will remain basically stable】After entering 2024, the US dollar index will show strong resilience, with many phased rebounds, and there will be a see-saw trend between non-US currencies such as RMB and the US dollar. In the medium to long term, the relative changes between the Chinese and US economies in terms of monetary policy, growth path, price level, and balance of payments will drive a weaker dollar and a stronger renminbi. However, in the short term, due to the impact of factors such as the postponement of the Fed's interest rate cut, the RMB exchange rate against the US dollar will still show periodic fluctuations. It is expected that the central parity of the RMB exchange rate against the US dollar in the second quarter will fluctuate in both directions in the range of 6.95-7.15, which is basically stable and stable. After the third quarter, with the establishment of the Fed's interest rate cut process and China's economy further stabilizing and improving, the central parity of the RMB exchange rate against the US dollar may move further upward.

【Eight Policy Recommendations】Expand the market-oriented issuance of treasury bonds, encourage individuals and small, medium and micro enterprise investors to actively subscribe; The scale of issuance of Tier 2 capital bonds and local special bonds will enhance the function of financial services for the real economy through the replenishment of exogenous capital; promote the implementation of the policy of exchanging consumer goods for new ones through a multi-pronged approach; accelerate the development of service consumption with new ideas and new measures; promote the quality and efficiency of investment through comprehensive measures; promote exports by expanding high-level opening up; intensify policies to better meet the housing needs of residents; effectively increase the investment of financial resources and properly handle the risks of real estate enterprises.

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Outlook 1: The Fed's interest rate cut expectations affect the international economic environment

Since the beginning of 2024, the international economic environment has been mixed: on the one hand, the complexity and uncertainty of the world economy remain high, and the level of economic growth and inflation in advanced economies has diverged significantly, and on the other hand, global trade is picking up at an accelerated pace, with some positive changes.

First, there is a divergence in the trend of advanced economies. On the whole, there is a situation of "the United States is strong, the Japanese is flat, and Europe is weak". The U.S. non-farm payrolls data and manufacturing situation in March improved more than expected. Among them, non-farm payrolls increased by 303,000, well above market expectations of 200,000, and the ISM manufacturing index unexpectedly rose to 50.3 in March, ending a 16-month contraction in the manufacturing sector. Japan narrowly avoided a technical recession. In March, the Bank of Japan announced the end of negative interest rates, raising interest rates for the first time in 17 years. Growth in Europe is generally sluggish. The UK clearly declared a technical recession in the first quarter, the Bundesbank predicted that the German economy could fall slightly again in the first quarter, after falling by 0.3% in the fourth quarter of last year, and fell into a technical recession, and Statistics France expects French GDP to stagnate in the first quarter.

Second, inflationary pressures in the United States and Europe are diverging. The preliminary Eurozone CPI rose by 2.4% year-on-year in March, lower than the expected 2.6%, and the core CPI, which excludes factors such as food and energy, also fell more than expected. In contrast, although the core PCE, a key inflation indicator preferred by the Fed in February, grew by 2.8% year-on-year, lower than market expectations, the CPI indicator was well above the target level set by the Fed by 2%, and there is a momentum of accelerated recovery, with the US CPI rising 3.5% year-on-year in March, an increase of 0.3 percentage points from February, exceeding market expectations, and the core CPI rose 3.8% year-on-year and 0.4% month-on-month. Inflationary pressures in the United States and Europe have diverged significantly, largely due to economic growth on both sides.

Third, global trade has picked up at an accelerated pace. In the first quarter, there were a series of positive changes in the global trade environment, including: the relationship between China and the United States has shown a trend of easing and improving, the formation of new global industrial and supply chain networks is accelerating, cross-border e-commerce is booming, and the global trade contraction last year has given rise to new demand for replenishment of inventories. The World Trade Organization (WTO) believes that after a weak performance in 2023, global trade in goods may start to grow slightly in the first quarter of 2024. The United Nations Conference on Trade and Development (UNCTAD) also noted that available data for the first quarter of 2024 suggest that global trade will continue to improve. From the perspective of the global air cargo market, due to the strong export demand in the Asia-Pacific and the Middle East, the global air cargo demand in the first quarter increased by 11% year-on-year for three consecutive months, and in terms of sea freight prices, the Baltic Dry Bulk Index climbed from 1,300 points in mid-January to 2,300 points in mid-March. To some extent, these data reflect the fact that global trade is picking up. Due to the difficulty of resolving the Red Sea crisis in a short period of time, some exports from East Asia to Europe have to bypass the Cape of Good Hope, and "Made in China" has more cost advantages and transportation advantages. This further highlights the geopolitical value of China's Belt and Road Initiative.

After the second quarter, the complexity and uncertainty of the international economic environment will continue. One of the biggest uncertainties is when the Fed's rate cut process will begin. This will have a series of important impacts on national monetary policies, international financial markets, and cross-border capital flows.

Prediction 1: The Fed's interest rate cut may be delayed. Driven by factors such as faster-than-expected economic growth in the United States and a slowdown in inflation, the Fed may delay and weaken the rate cut at the end of the second quarter, which was widely expected. It is expected that the Fed will start to cut interest rates for the first time in the third quarter of 2024, and may cut interest rates 1-2 times throughout the year, about 25-50 basis points, and may cut interest rates by another 200 basis points in 2025. Unlike the United States, due to economic stagnation and rapid decline in inflation, the European Central Bank and the Bank of England are expected to start cutting interest rates for the first time around the middle of the year before the Fed.

Prediction 2: The volatility of the international financial market will intensify. From the perspective of the stock market, the expectation that the Fed will postpone the rate cut will promote the recovery of US Treasury yields, and market funds will be invested in US bonds that take into account both safety and higher yields, and US stocks may face the risk of a correction. From the perspective of the foreign exchange market, due to the postponement of the Fed's interest rate cut, the dollar index will be strongly supported in the second quarter, and non-US currencies will continue to be suppressed, and the phased weakening of the US dollar in the early stage will be further reversed. From the perspective of the gold market, the delay of the Fed's interest rate cut may lead to an increase in the risk of a correction in gold prices in the short term, but driven by the safe-haven demand for geopolitical conflicts such as Russia and Ukraine and the Middle East, gold prices are still likely to continue to rise in the medium term and hit a new high.

Prediction 3: Cross-border funds will gradually flow back to emerging markets. It is worth noting that the Fed's postponement of the rate cut is only a postponement, not a non-cut or rate hike, and it cannot fundamentally reverse market expectations. At the same time, the rapid growth rate of emerging economies represented by China in the first quarter will be more attractive to cross-border funds. In the first quarter, while emerging markets in Latin America, Europe and the Middle East were still seeing net outflows, emerging markets in Asia have seen a more pronounced trend of net inflows. The latest data shows that global capital is accelerating its return to China, with more than 90% of emerging market funds already increasing their holdings in Chinese equities. This trend is expected to strengthen further in the second quarter.

Outlook 2: Fiscal efforts will focus on local special bonds and ultra-long-term special treasury bonds

In March this year, the State Council's government work report set the tone of fiscal policy as "moderate strengthening, quality and efficiency". Specific work targets include: This year's deficit rate will be arranged at 3 percent, with a deficit of 4.06 trillion yuan, an increase of 180 billion yuan over the previous year's budget; the scale of general public budget expenditure will be 28.5 trillion yuan, an increase of 1.1 trillion yuan over the previous year; and 3.9 trillion yuan of local government special bonds will be arranged, an increase of 100 billion yuan over the previous year. What is particularly noteworthy is that the central authorities have decided to issue ultra-long-term special treasury bonds for several consecutive years starting this year, which will be used specifically for the implementation of major national strategies and security capacity building in key areas, and will first issue 1 trillion yuan this year. Considering that this year is the penultimate year of the "14th Five-Year Plan", the role of connecting the past and the next two years is more obvious, and the following "15th Five-Year Plan" will continue until 2030, which is extremely crucial for the mainland to achieve the long-term goal of achieving per capita GDP to reach the level of moderately developed countries by 2035. Therefore, it is very likely that the "consecutive years" will be 4-5 years, that is, from 2024-2025 at the end of the 14th Five-Year Plan to 2027 or 2028 in the middle of the 15th Five-Year Plan. If the arrangement is arranged at 1 trillion yuan every year, the final total issuance scale may be as high as 4-5 trillion yuan, which will far exceed the previous issuance scale of 270 billion to 1.55 trillion yuan of special treasury bonds, which will not only bring considerable policy stimulus increments, but also greatly boost market confidence.

Judging from the progress of fiscal policy in the first quarter, the characteristics of "moderate strengthening, quality and efficiency" are fully reflected. First, the pace of fiscal expenditure has been accelerated. From January to February, the national general public budget expenditure increased by 6.7% year-on-year, completing 15.3% of the annual budget, and the expenditure progress was the fastest in the same period in the past five years. Second, the trillion-dollar treasury bond project has been fully implemented. The 1 trillion yuan of additional treasury bond issuance funds launched at the end of last year were all issued in February this year, and 15,000 specific projects were implemented, and its policy effects will be released mainly this year. As of the end of the first quarter, the start-up rate of projects in some provinces and cities was close to 50%. Third, the issuance of local bonds is basically in line with expectations. In the first quarter, various localities plan to issue 1.69 trillion yuan of local bonds, of which 838 billion yuan will be added to special bonds. Judging from the actual situation, the pace of local bond issuance slowed down slightly from January to February, affected by the increase in the issuance of treasury bonds, and the issuance of bonds in March was 629.4 billion yuan, an increase of 12.41 percent month-on-month. In the first quarter, 1.57 trillion yuan was actually issued in various places, 93.09% of the planned progress was completed, and 634.1 billion yuan of new special bonds were actually issued.

Looking ahead to the second quarter, the mainland will coordinate the needs of macroeconomic regulation and control, fiscal sustainability, and optimization of the tax system, and comprehensively use the investment in the central budget, funds from newly issued treasury bonds, policy-related development funds, as well as policy tools such as financial subsidies, financial interest discounts, and financing guarantees, and take multiple measures to maintain a reasonable degree of expansion. The first is to implement the structural tax and fee reduction policy. We will improve the financial support policies for small and medium-sized enterprises, further reduce or exempt value-added tax and income tax for small, medium and micro enterprises, and implement tax incentives such as additional deductions for R&D expenses. The second is to increase financial support for industrial transformation and upgrading. We will increase tax and fee support for advanced manufacturing, digital economy and other industries, focus on the construction of a modern industrial system, and promote the construction of major infrastructure such as energy, water conservancy, transportation, and new infrastructure. The third is to increase fiscal spending in the field of people's livelihood. We will increase the reduction or exemption of taxes and fees and financial subsidies for small, medium, and micro enterprises, individual industrial and commercial households, enterprises that stabilize and expand jobs, and employment training institutions, and increase related expenditures on medical care, pensions, and education. Fourth, speed up the pace of local bond issuance. As the impact of new government bond issuance weakens, it is expected that the issuance of local government bonds, especially new special bonds, is expected to accelerate in April and May. As of early April, various localities have disclosed that they plan to issue more than 1.9 trillion yuan of local bonds in the second quarter, of which 1.05 trillion yuan are planned to be issued special bonds. Fifth, the issuance of 1 trillion yuan of ultra-long-term special treasury bonds should be launched in a timely manner. Judging from historical experience, it is quite possible that the issuance of special treasury bonds will be carried out in the third quarter, but it cannot be ruled out that in order to form a physical workload as soon as possible, the issuance will be carried out at the end of the second quarter. For example, in 2020, the issuance of 1 trillion yuan of anti-epidemic special treasury bonds began in mid-June of that year and was completed by the end of July.

Outlook 3: Monetary policy will be further stable and loose

According to the spirit of the Central Economic Work Conference and the Government Work Report, the prudent monetary policy in 2024 will be "flexible, moderate, precise and effective", pay attention to counter-cyclical and cross-cyclical adjustment, continue to operate loosely, and cooperate with the fiscal policy to focus on increasing support for scientific and technological innovation, advanced manufacturing, green transformation, inclusive small and micro enterprises, digital economy, etc., and strive to expand domestic demand, boost confidence, and promote a virtuous cycle of the economy.

In the first quarter, the monetary policy played a good role in the dual functions of aggregate and structure, guiding finance to better serve the real economy. In terms of aggregate and price instruments, the PBOC released a series of looser policy signals than expected in the first quarter: a net injection of 370 billion yuan of medium-term base money into the banking system through the medium-term lending facility (MLF), a 0.5 percentage point reduction in the reserve requirement ratio of financial institutions to provide long-term liquidity to the market of about 1 trillion yuan, and a 25-year LPR interest rate, the largest decline since the LPR reform, effectively driving down the loan interest rate and social comprehensive financing costs. The above measures will help enhance the ability and enthusiasm of commercial banks to increase credit supply, stabilize and restore confidence in the capital market, improve the liquidity of the real estate market, and promote a further stable economic recovery. In terms of structural tools, the central bank strengthened the comprehensive use of structural policy tools in the first quarter. The rediscount rate was lowered by 25 basis points to continue to reduce the cost of financial institutions, and the collateral supplementary loan (PSL), which has the dual attributes of quasi-fiscal and monetary investment, added 150 billion yuan in January this year, following the addition of 350 billion yuan in December last year, in order to increase support for the planning and construction of affordable housing, the transformation of urban villages, and the construction of public infrastructure for both ordinary and emergency purposes. In terms of financial support for the real economy, since the beginning of this year, the growth of medium and long-term credit to key industries of the national economy has remained high. At the end of February, the balance of medium and long-term loans in the manufacturing industry was 13.13 trillion yuan, a year-on-year increase of 28.3%, of which the balance of medium- and long-term loans in the high-tech manufacturing industry increased by 26.5% year-on-year, and the balance of loans to high-tech, "specialized, special and new" and science and technology small and medium-sized enterprises increased by 14.2%, 18.5% and 21.4% year-on-year, all of which were significantly higher than the growth rate of loans of 10.1% in the same period.

Looking ahead to the second quarter and the second half of the year, the monetary policy orientation will continue to remain steady and loose, and efforts will be made to create a favorable monetary and financial environment for the economic recovery.

First, we will continue to make good use of aggregate and price tools to maintain reasonable and abundant liquidity. In addition to the scale of social financing and M2 to maintain a growth rate of not less than 8%, the possibility of another RRR cut in the second quarter or the second half of the year cannot be ruled out, and it is expected that the second RRR cut may be mainly targeted. At present, the reserve requirement ratio of small and medium-sized banks has dropped to 5.0-6.5%, while the reserve requirement ratio of large banks is 8.5%, and there is still some room for reduction. With the Fed likely to turn to interest rate cuts around mid-2024, and the European Central Bank and other central banks in developed and some developing countries to follow, the room for a mainland policy rate cut will be further opened. It is expected that there is room for MLF to decline by 10-20bp, and LPR may still be lowered accordingly.

The second is to make good use of structural monetary policy tools and strengthen guidance and incentives for financial institutions. This includes continuing to implement re-lending to support carbon emission reduction, expanding the scope of support and increasing the scale of re-lending, appropriately increasing the scale of re-lending to support agriculture and supporting small and medium-sized enterprises, continuing to implement inclusive small and micro loan support tools, and expanding the standard of inclusive small and micro loans covered by relevant incentive policies from no more than 10 million yuan to no more than 20 million yuan for a single household. In April this year, the central bank also announced the establishment of a new structural monetary policy tool "scientific and technological innovation and technological transformation re-lending" on the basis of the original scientific and technological innovation re-lending and equipment renovation special re-lending, aiming to encourage and guide financial institutions to increase financial support for small and medium-sized scientific and technological enterprises, technological transformation and equipment renewal projects in key areas. The reloan amount for scientific and technological innovation and technological transformation is 500 billion yuan, with an interest rate of 1.75% and a term of 1 year, which can be extended twice and each time for a period of 1 year.

Third, we should reasonably grasp the relationship between the two largest financing markets, bonds and credit, and support enterprises in issuing bonds to release more credit resources. On the one hand, we will strengthen coordination and cooperation with fiscal policies to ensure the smooth issuance of government bonds and continue to promote the development of the corporate credit bond and financial bond markets; on the other hand, we will support financial institutions to actively tap credit demand and project reserves, and take multiple measures to promote the reasonable growth of loans. In the future, the scale of central and local bond issuance is expected to be moderately expanded, and corporate bond financing is likely to continue to increase. The freed up bank credit can be used to meet the capital needs of enterprises and residents in other areas.

In the second quarter, monetary policy will also work closely with fiscal policy. The two work together and complement each other to create loose macro policy space, create a good monetary and financial environment, and jointly help the economy operate within a reasonable range. If monetary policy can play a more active role in smoothing out the impact of daily fiscal revenue and expenditure, supporting the centralized issuance of government bonds, meeting the financial needs of key areas and weak links of the state, and supporting the establishment of policy-oriented development financial instruments, the dual expansion effect of macroeconomic policies will be able to better meet the actual needs of economic operation.

Outlook 4: GDP for the full year is likely to be higher than the stated growth target

In the first quarter, driven by the simultaneous improvement of supply and demand, the economy achieved a relatively rapid recovery, with GDP growth of 5.3%, significantly better than market expectations, laying a solid foundation for the economy to achieve the established growth target for the whole year. In the first quarter, domestic demand and net exports contributed 85.5% and 14.5% to economic growth, respectively.

In the second quarter, while year-on-year growth is likely to slow from a higher base, quarter-on-quarter and two-year averages will accelerate. Driven by the rapid growth of infrastructure investment and manufacturing investment and the stabilization and rebound of real estate investment, investment will continue to play a role in "stabilizing growth" and its contribution to GDP will accelerate. However, a higher base will also hinder growth. GDP growth is expected to be around 4.5% in the second quarter.

Economic growth for the full year is likely to be higher than the set target. Due to the unsatisfactory economic growth last year, there was no strong recovery expected after the full liberalization of the epidemic, and the continued decline in real estate, the low growth rate of CPI and the high employment pressure caused pessimism to spread in the market, resulting in a generally cautious attitude towards this year's economic recovery. The "Government Work Report" set this year's economic growth target at about 5 percent, which was also set after comprehensively considering the situation in various aspects. However, judging from the economic operation in the first quarter, a number of economic indicators, including GDP, were better than market expectations, indicating that China's economy has recovered well, not only with increased domestic vitality, but also with improved external demand. If the relevant policies continue to be put in place, there is still room for economic growth in the next three quarters to be repaired beyond expectations. At present, consumption is recovering well, with many consumer expenditures during the Spring Festival and Qingming holidays exceeding pre-pandemic levels, rapid growth in food and beverage and other services, and a record high in the first quarter of 2019 for automobile sales. Driven by sufficient funds, abundant projects, improved business conditions and policy support, infrastructure investment and manufacturing investment have maintained rapid growth, and the "steady growth" of investment has been further strengthened. In dollar terms, exports grew by 1.5 percent in the first quarter, effectively complementing economic growth. In addition, the manufacturing PMI rose sharply by 1.7 percentage points to 50.8 in March, returning to the expansion range for the first time in six months. In order to maintain the good momentum of economic recovery in the first quarter, macro policies will continue to be strengthened in the remaining three quarters, which is expected to promote the economic growth of the whole year beyond expectations. Final consumption is expected to grow by 7.4% in 2024, contributing about 50% to GDP, capital formation to grow by 3.8% and contributing about 35% to GDP, and net exports to 2% to GDP to contribute about 15%. GDP grew by about 5.3% for the whole year.

Outlook 5: Investment will continue to grow steadily

In the first quarter, driven by financial support and policies, investment became the biggest bright spot in economic operation. In the first quarter, investment in fixed assets increased by 4.5% year-on-year, 1.5 percentage points faster than that of the previous year, significantly better than market expectations. Among them, infrastructure and manufacturing investment increased by 6.5% and 9.9% respectively, further consolidating the position of the two major drivers of stable growth. Real estate investment fell by 9.5%, and the decline widened, and the drag on investment continued to appear.

After the second quarter, the growth rate of infrastructure investment and manufacturing investment was relatively high, and the decline in real estate investment narrowed, jointly promoting the rapid growth of fixed asset investment. First of all, with the effect of countercyclical policies, strong support of financial resources and abundant major projects, infrastructure investment will play a strong role in supporting the economy. The special bonds carried forward and issued ahead of schedule in the fourth quarter of last year, as well as the additional issuance of special treasury bonds, have already begun to form a physical workload in the first quarter, and are expected to accelerate the formation in the second quarter. Second, the issuance of local special bonds in the second quarter will be faster than that in the first quarter, and the source of funds will be fully guaranteed. From the perspective of historical experience, the second quarter is generally the peak of new special bond issuance. Considering the slow issuance in the first quarter, the strong demand for stable growth in the fiscal front, and the time lag in the conversion of funds into physical workload, it is expected that the issuance of government bonds will accelerate significantly in the second quarter. The acceleration of the issuance of special bonds, the continued use of additional treasury bond funds at the end of last year, and the possible start of the issuance of ultra-long-term special treasury bonds and the superposition of some supporting funds will jointly form a "volume" support for infrastructure investment funds in the second quarter. Thirdly, major projects remain relatively abundant. Sufficient funds have effectively alleviated the financial pressure on some low- and medium-risk local governments, enabling them to dare and be able to carry out effective infrastructure investment projects. It is expected that under the combined influence of sufficient sources of funds and stable growth requirements, the construction of major projects in the second quarter and the second half of the year is expected to be further accelerated. However, the sluggish land market and the limited start of infrastructure projects in high-risk provinces with local bonds have restricted the growth rate of infrastructure investment.

Manufacturing investment will continue to grow rapidly, with the growth rate exceeding the pre-epidemic level, and the role of stabilizing growth will be strengthened. First, with the continuous recovery of the economy, the demand for technological transformation investment continues to release (technological transformation investment accounts for more than 40% of manufacturing investment), which forms an important support for manufacturing investment. The recently launched equipment renewal policy is conducive to further promoting the increase in demand for technological transformation investment. Second, the operating conditions of private enterprises have improved. In the first quarter, private investment increased by 0.5 percent, and the growth rate further accelerated; the profits of industrial enterprises turned from negative to positive. Private investment accounts for 75% of the entire manufacturing investment, and the improvement of the operating conditions of private enterprises can enhance the enthusiasm of investment, thereby driving manufacturing investment. Third, external demand has picked up. In the first quarter of this year, external demand rebounded significantly, driving exports to grow more than expected. In dollar terms, exports rose 0.5% in the first quarter. Fourth, the resonance of the Sino-US replenishment cycle has been positively driven. As of the first quarter of 2024, the current round of destocking cycle of industrial enterprises has lasted for 23 months, exceeding the average level of the previous six rounds of 20 months, and the PPI index highly correlated with the growth rate of enterprise inventory has rebounded marginally, coupled with a number of economic indicators in the first quarter exceeding expectations, all indicate that industrial enterprises are likely to start the inventory replenishment cycle in the future. At present, the U.S. manufacturing industry has shown signs of weak replenishment, and this trend is expected to be further clarified in the second quarter. Fifth, strong policy and financial support. As one of the important starting points for stable growth, manufacturing investment has strong support from the policy level and the capital level. At the end of March, manufacturing loans grew by more than 20%. Overall, it is expected that the investment in fixed assets will increase by 4.5 percent in the second quarter, of which infrastructure investment will increase by 7 percent and manufacturing investment will increase by 9.5 percent, and the investment in fixed assets will increase by 6 percent for the whole year, of which infrastructure investment and manufacturing investment will increase by 7 percent and 10 percent respectively.

Outlook 6: Consumption maintains the primary driving force for economic growth

In the first quarter of 2024, consumption continued to recover steadily, and service consumption maintained rapid growth. In the first quarter, retail sales of consumer goods increased by 4.7% year-on-year, and retail sales of services increased by 10.0% year-on-year.

In the second quarter and the second half of the year, driven by many favorable factors, consumption will continue to maintain a steady and rapid growth recovery trend, and will still be the first driving force for GDP growth, but the contribution rate will gradually return to normal. From 2011 to 2023, the average contribution of final consumption to GDP is about 52%.

The employment situation has gradually improved, and residents' incomes have grown steadily. The improvement of the employment situation is an important factor influencing the growth of residents' income. In the first quarter of 2024, the surveyed urban unemployment rate was 5.2%, down 0.3 percentage points from the same month last year. Consumption is a function of income, and the level of income has a greater impact on consumption. In the first quarter of 2024, the per capita disposable income of mainland residents grew at a nominal rate of 6.2%, and the recovery of the residential sector has been faster than that of the government and enterprise sectors for four consecutive quarters. Residents' willingness to consume has increased, and the average consumption tendency has recovered, driving the recovery of consumer demand. In 2023, although the sales of most goods improved, the sales of real estate-related goods (renovation materials, furniture, home appliances, etc.) did not perform as expected. According to estimates, a fluctuation of 1 point in real estate investment will affect consumption by 2 to 3 points. The stabilization and rebound of real estate will be good for consumption. Car sales got off to a good start. In the first quarter, auto sales increased by 3.8% year-on-year, driving the company by 0.5 percentage points. According to the data, the retail sales of passenger cars in mainland China increased by 13.1%, and the sales of automobiles increased by 10.6% year-on-year. Automobile sales accounted for about 10% of the company's zero, and automobile sales improved significantly, which had a great effect on consumption. In 2023, the per capita consumption expenditure on services increased by 14.4% year-on-year, higher than the 5.8% growth rate of commodity consumption and 9.0% of total consumption, and the retail sales of services increased by 20.0% over the previous year, of which the consumption of services such as catering and tourism performed well. In the first quarter of 2024, retail sales of services increased by 10.0% year-on-year. During the Spring Festival holiday and the Qingming holiday, the consumption data of many services such as tourism, accommodation, catering and movie box office in mainland China exceeded the pre-epidemic level, and the recovery situation was good. In recent years, the proportion of services consumption in the overall per capita consumption has exceeded 45%. From the perspective of international experience, after entering the middle-income stage, service consumption will be in a rapid growth channel for a long time, and there is a large room for growth. The recovery of CPI and PPI will lead to an increase in consumer prices. However, the high base also constrains the growth rate. Retail sales of consumer goods are expected to grow by 4% in the second quarter.

The trade-in policy for consumer goods will play a positive role. Although retail sales of consumer goods will grow by 7.2% in 2023, and final consumption will contribute 82.5% to economic growth, it is based on a low base in 2022. According to the two-year average growth rate, the retail sales of consumer goods increased by 3.4%, far lower than the growth level of more than 8% before the epidemic. Among them, the sales of automobiles increased by an average of 3.3% in two years, while the sales of furniture and home appliances decreased by 2.5% and 1.7% respectively in two years. Durable consumer goods such as automobiles and household appliances usually account for about 35% of the total retail sales of enterprises above designated size, which plays an important supporting role in consumption. In the past two years, consumer durables have provided limited support for overall consumption, and some have even been a drag. According to the policy deployment, the trade-in of durable consumer goods will become a key task to promote the steady growth of consumption this year. The mainland has a huge trade-in durable goods consumer market. Continental automobiles and home appliances and other large durable consumer goods have entered the era of both increment and stock from the era of pure increment. In 2023, the number of cars will be about 336 million, and the number of major categories of household appliances such as refrigerators, washing machines, and air conditioners will exceed 3 billion. In the short term, the trade-in policy can stimulate consumer demand and related investment, and stimulate and expand domestic demand. In the long run, the trade-in can further promote the transformation and upgrading of consumption and the optimization and upgrading of the industrial structure, and drive the economy to achieve high-quality transformation and development. According to estimates, the total consumption of automobiles and home appliances is expected to bring about 350 billion to 400 billion yuan of consumption increment, driving the year-on-year growth rate of total retail sales of consumer goods in 2024 to increase by 0.7 percentage points to 6.2%.

Outlook 7: The contribution of net exports to economic growth will turn positive

In the first quarter, the growth rate of mainland imports and exports turned from negative to positive, better than market expectations. In dollar terms, imports and exports, exports and imports all increased by 1.5 per cent. The recovery of external demand, the recovery of the U.S. real estate cycle and the start of the inventory replenishment cycle have led to rapid growth in exports. The improvement of domestic demand and price factors have pushed the growth rate of imports from a decline to an increase. In the first quarter, exports, one of the "troikas", achieved good results, making a positive contribution to achieving the set growth target for the whole year.

In the first quarter of 2024, external demand showed a warming trend. First, the recovery of the global manufacturing industry has accelerated. The global manufacturing PMI was 50.3 in March, up 1.2 percentage points from the previous month, and returned to the expansion range after 17 months. In the first quarter, the global manufacturing purchasing managers' index averaged 49.6, up from the average of 47.9 in the fourth quarter of last year. Second, the global trade boom has rebounded marginally since the fourth quarter of last year. In the first quarter of this year, the BDI index was generally stronger than last year's level. The Reuters Jefferies Commodity Futures Index (RJ/CRB) continued its upward trend that began in December 2023. The RJ/CRB index rose 10.0% to 290.29 points, basically filling the decline since the third quarter of 2022. Among them, the RJ/CRB index rose by more than 5.5% in a single month in March. Third, the export data of countries and regions around the mainland have also improved. Among them, South Korea's exports increased for six consecutive months in March; Japan's manufacturing PMI and exports improved in March; and exports from Singapore, Malaysia, Thailand and other ASEAN member countries also rose to varying degrees.

Looking ahead to the second quarter and the full year, export growth is expected to exceed expectations. Externally, despite the divergence in the degree of recovery of the world's major economies, external demand as a whole is still picking up. U.S. economic growth is relatively resilient. Under the cyclical recovery of real estate and the opening of the replenishment cycle, the momentum of the recovery of the U.S. manufacturing industry began to strengthen. Since the beginning of last year, new home sales and starts in the United States have begun to recover, and existing home sales have also picked up significantly this year. As the Fed's interest rate hikes come to an end, the U.S. manufacturing inventory cycle has bottomed out. Judging from the latest data, the year-on-year growth rate of total sales in the United States has begun to turn positive, the Markit manufacturing PMI has expanded for three consecutive months, and the ISM manufacturing PMI self-owned inventory index has also rebounded significantly. Despite the weaker overall recovery in Europe, demand remains strong in emerging countries such as ASEAN and Russia. In addition, new export formats continue to develop, and cross-border e-commerce is growing rapidly. In the first two months of this year, the import and export volume of cross-border e-commerce increased by nearly 10%. Cross-border e-commerce shortens the distance between foreign trade enterprises, especially small and medium-sized enterprises, and the international market, and has a more obvious role in promoting exports. From an internal point of view, the advantages of the whole industrial chain, strong production capacity, optimization of export structure and low base also support exports. However, the shift of labor-intensive exports overseas has also dragged down exports to a certain extent.

Domestic demand on the mainland is generally stable, consumption has recovered steadily, infrastructure investment and manufacturing investment have maintained rapid growth, and demand may further recover compared with 2023. Specifically, the start of construction of a large number of infrastructure projects, equipment renewal and the introduction of durable goods trade-in policies will boost the construction and manufacturing industries, and form a greater support for upstream bulk raw materials. With the continuous release of residents' demand for upgrading consumption, the import of foreign high-quality textiles, clothing, jewelry and other wearable consumer goods and optional goods such as dried and fresh melons and fruits, beef and other edible consumer goods will also increase, promoting the growth of imports. It is expected that the growth rate of imports for the whole year will rise slightly. In terms of imports and exports, the trade surplus remains at a reasonable level, and the contribution rate of net exports to GDP may turn from negative to positive. Overall, exports are expected to grow by 3 percent and imports by 1 percent in US dollar terms in the second quarter, and exports by 2.5 percent and imports by 0.5 percent for the full year.

Outlook 8: The real estate market seeks to bottom out and stabilize

In the first quarter of 2024, the real estate market is still in the stage of grinding the bottom. Mortgage interest rates continued to fall, the threshold for buying houses was further lowered in various places, and the lower limit of the first home loan interest rate was cancelled in some cities, but the demand for housing was still relatively sluggish, and the sales area of commercial housing fell by 19.4% year-on-year, and housing prices fell. The policy promotes the implementation of the real estate financing coordination mechanism, which is subject to the credit risk of real estate enterprises, the credit support of commercial banks is not sufficient, and the balance of off-balance sheet financing continues to decline. The land market continued to shrink, some key cities have improved, and the premium rate of land auctions in core urban areas has risen. Policy-led support projects play a supporting role. Affected by the high base factor and the decline in surplus funds, the area of new housing starts fell by 27.8%, the construction and completion process slowed down, and the real estate investment fell by 9.5%.

After the second quarter, the real estate market is expected to reach a phased bottom and then stabilize after bottoming. The high base factor will gradually fade in the middle to late second quarter, and the expansion of existing home sales will promote the marginal improvement of the commercial housing sales market. Shanghai and Shenzhen adjusted the "7090" policy in the first quarter, Beijing and Guangzhou also canceled some restrictive housing purchase policies, and the housing purchase policies in first-tier cities were further optimized, which will help better meet the needs of home buyers for large and improved housing. It is estimated that by the end of the second quarter, the sales area of commercial housing in China will fall by about 15% year-on-year, which is 5 percentage points narrower than that at the end of the first quarter. The quarter-on-quarter decline in housing prices in the second quarter is expected to converge, and the prices of new homes in first-tier and key second-tier cities are "bottoming out" on the basis of the stabilization and recovery of land auction prices, and the prices of second-hand houses are relatively weak. It is estimated that by the end of June, the average monthly price of new homes will fall by 0.2% month-on-month, and the average monthly decline of second-hand homes will be 0.5%, and the decline will converge to varying degrees compared with the first quarter. It is estimated that the scale of debt maturity and interest expenses of real estate enterprises in the second quarter will be reduced by about 200 billion yuan compared with the first quarter, and real estate enterprises will enter a buffer stage after passing the period of high debt repayment pressure in the first quarter. Driven by the policy, the housing credit supply of commercial banks is expected to heat up, and the issuance of real estate enterprise bonds, ABS and REITs is steadily advancing, which will help alleviate the market's worries about the risks of real estate enterprises. Some high-quality real estate companies will continue to deploy in the land and residential markets in first-tier and key second-tier cities, which will promote the narrowing of the decline in land purchase fees. Under the long-term trend of the overall reduction of funds in place for real estate enterprises, the construction of real estate projects is mainly based on controlling new additions and promoting the completion of existing projects, benefiting from the weakening of the impact of high base, and it is expected that by the end of the second quarter, the cumulative area of new housing construction will decline by about 18% year-on-year, and the decline will be about 10 percentage points narrower than that at the end of the first quarter. The central bank proposed to increase financial support for the "market + security" housing supply system, and the construction of affordable housing, the construction of public infrastructure for both ordinary and emergency purposes, and the transformation of urban villages and other "three major projects" may accelerate the implementation of project construction, and partially make up for the housing supply gap caused by the decline in the construction of commercial housing projects. According to comprehensive calculations, it is expected that real estate development investment in the second quarter will decline by about 9% year-on-year, and the decline will be narrower by 1 percentage point than that at the end of the first quarter.

It is necessary to beware of the situation that the risk exposure of real estate companies may expand. Due to the continuous slowdown in commercial housing sales, the limited allocation of new development loans by banks, and the downgrading of the credit ratings of some real estate enterprises, the problem of tight cash flow of real estate enterprises has not been fundamentally solved. Since the first quarter, the sales performance of many leading real estate companies has fallen by more than 40% year-on-year, and the cash short-term debt ratio of more than 40% of listed real estate companies is less than 1, and some debts have been substantially defaulted. Looking forward to the second quarter, although the scale of debt and interest expenses due by real estate enterprises decreased by about 150 billion yuan quarter-on-quarter, after excluding this part of the debt repayment scale, there may still be a gap of about 200 billion yuan in the remaining funds. Therefore, it is difficult to completely rule out the possibility of real estate companies taking risks after the second quarter.

Outlook 9: The price level is expected to gradually recover

In the first quarter of 2024, the overall price level is still running at a low level. The cumulative CPI was 0% year-on-year, down 0.2 percentage points from the end of the fourth quarter of 2023, and the tail factor dragged down significantly, while the core CPI remained at 0.7% year-on-year. The slowdown in CPI growth is mainly due to the decline in food prices, pork prices have generally stabilized at a relatively low level, but the decline in food prices such as fresh vegetables and wine has led to a decline in food CPI growth. The growth rate of non-food CPI rose as a whole, with the prices of the service industry represented by tourism leading the rise in the context of demand recovery, the recovery of clothing, daily necessities, and medical care sub-items was moderate, and the cost of living of residents increased slightly. The cumulative PPI was -2.7% year-on-year, 0.3 percentage points lower than the decline in the previous quarter. Although the decline has moderated, the monthly PPI fell month-on-month, indicating that the industrial sector has been slow to recover prices. In terms of sub-items, the prices of means of production recovered by 0.6 percentage points to -3.3%, as the year-on-year decline in PPI for extractive industries and raw materials narrowed by 1.5-2 percentage points due to rising crude oil and base metal prices. The prices of means of living have slowed down across the board, especially the decline in PPI for durable goods, the prices of building materials and decoration materials have further declined, and the decline in mechanical materials for traditional automobile manufacturing related equipment has not been small. In the first quarter of 2024, the price scissors spread (CPI-PPI) was 2.7%, down 0.5 percentage points from the previous value, but still at a relatively high historical level, indicating that the improvement in consumer demand is limited, and prices in the industrial sector are still subject to the impact of the real estate downward cycle.

After the second quarter, the price level is expected to gradually rise from a low level. In the second quarter, the CPI tail factor turned from negative to positive will help the CPI to rebound year-on-year, especially the food prices represented by pork prices; non-food prices are expected to continue the upward trend in the first quarter, tourism-related consumer goods prices still have further upward momentum during the holiday season, gasoline and diesel prices will push transportation prices higher, and daily consumer goods are expected to rise slightly in the process of demand recovery. It is expected that by the end of the second quarter, the cumulative CPI will rise to 0.3% year-on-year, resuming its upward trend after five quarters. The cumulative year-on-year rebound in PPI was more pronounced than in the first quarter, mainly due to the low base last year. Since the beginning of the second quarter, with the rise in the prices of major commodities in the world, the import prices of crude oil and basic metals in the mainland have risen accordingly, and the marginal decline in real estate construction in the current period has narrowed, which will comprehensively promote the decline in PPI means of production to narrow rapidly in the second quarter. The decline in PPI means of living is still likely to expand slightly, as the lag of the sharp decline in real estate sales in the previous two quarters and the decline in the PPI processing sub-item will gradually ferment. It is expected that by the end of the second quarter, the cumulative PPI will rise to -1.5% year-on-year, and the decline will converge faster. Correspondingly, in the second quarter of 2024, the price scissors spread (CPI-PPI) fell back to a high of 1.8%, as the domestic support policies further accelerate the implementation of the effect, domestic consumer demand improves, the short-term downward pressure on real estate weakens marginally, and the imported inflationary pressure increases, the price scissors spread is expected to accelerate the downward convergence in the second quarter, and the overall price level is gradually accumulating upward momentum from the low level.

Outlook 10: The RMB exchange rate will remain basically stable

Since the fourth quarter of 2023, as the Fed's interest rate hike has come to an end, the U.S. dollar index has gradually turned around, and the exchange rate of non-U.S. currencies such as the RMB has shown a relatively obvious recovery momentum. However, after entering 2024, due to the repeated postponement of the Fed's interest rate cut policy, coupled with the relatively weak performance of the euro and the yen, the dollar index showed strong resilience throughout the first quarter, and there were many phased rebounds, and there was a see-saw trend between non-US currencies such as the RMB and the US dollar. As of the end of the first quarter, the onshore and offshore RMB exchange rates were 7.2207 and 7.2575 respectively, and the central parity of the RMB exchange rate in the interbank foreign exchange market was 7.095, which was lower than the end of last year, but still relatively stronger than the end of the third quarter of last year.

In the medium to long term, relative changes in monetary policy, growth path, price level, and balance of payments between the U.S. and Chinese economies will drive a weaker dollar and a stronger renminbi. First, sooner or later, the U.S. monetary policy will have to change its course, shifting from a contractionary monetary policy to a loose monetary policy, and after the interest rate cut begins, the U.S. dollar will enter the process of making up for depreciation, and non-U.S. currencies will generally appreciate. Second, the relative changes in the economies of China and the United States will help the dollar depreciate and the renminbi appreciate. As the impact of the pandemic fades away, China's economy is expected to maintain its recovery momentum and achieve growth of 5% or even slightly higher, while the US economy is more likely to grow in the 1%-3% range in the next few years. Third, price changes between China and the United States will affect the exchange rates of the two currencies through relative changes in the purchasing power of the currencies. The weakening of the domestic purchasing power of the unit US dollar and the relative stability of the domestic purchasing power of the unit RMB will inevitably lead to changes in the relative prices of the two currencies. Fourth, the balance of payments will affect the exchange rate changes from the market and supply and demand. Maintaining a relatively high surplus under the current account and improving the capital account position will contribute to the basic stability and strengthening of the RMB exchange rate.

In the short term, the exchange rate of non-US currencies such as the RMB against the US dollar will still show periodic fluctuations. First, the Fed's postponement of interest rate cuts, coupled with the short-term employment data in the United States exceeding expectations, and the high level of U.S. bond yields, the phased strengthening of the dollar will still receive a certain degree of support. Second, affected by geopolitics, financial markets and other factors, global risk appetite is still likely to rise, especially the current Russia-Ukraine conflict, Palestinian-Israeli conflict and other risks of intensification and continuous spillover, which is good for the safe-haven attribute of the US dollar. However, this shock is likely to be only a temporary disturbance, and the exchange rate of the RMB and the US dollar is mainly affected by fundamental factors.

To sum up, it is expected that the central parity of the RMB exchange rate against the US dollar in the second quarter will fluctuate in both directions in the range of 6.95-7.15, which is basically stable and stable. After the third quarter, with the establishment of the Fed's interest rate cut process and China's economy to further stabilize and improve, the RMB will maintain an appreciation trend on the basis of overall stability, and the central parity of the RMB exchange rate against the US dollar may further move up by the end of the year.

Eight policy recommendations

1. Expand the market-oriented issuance of treasury bonds

Starting this year, the mainland will issue ultra-long-term special treasury bonds for several consecutive years, which will be earmarked for the implementation of major national strategies and security capacity building in key areas. Traditionally, banks and other financial institutions have been considered the main investors in government and local government bonds. However, in order to set aside more bank funds to support the real economy, it is suggested that the market-oriented issuance of treasury bonds should be expanded, and individual investors should be encouraged to actively participate in the subscription of ultra-long-term special treasury bonds. From the demand side, mainland residents' demand for property investment and inclusive financial management are very strong. The central government has made it clear that the channels for urban and rural residents' property income should be broadened and the financial products that residents can invest in should be enriched. As of the end of 2023, the balance of RMB deposits was 284.26 trillion yuan, an increase of 25.74 trillion yuan for the whole year, a year-on-year increase of 10%. Among them, household deposits increased by 16.67 trillion yuan, accounting for two-thirds. In addition, the scale of wealth management of mainland banks has reached 26.8 trillion yuan, and the total scale of the securities investment and fund industry has exceeded 67 trillion yuan, which shows that residents have strong investment capabilities. Ultra-long-term special treasury bonds are guaranteed by national credit, which have the advantages of low risk, strong liquidity, relatively high returns, and exemption from interest income tax, making them a relatively safe investment object for individual investors. From the perspective of the supply side, in February this year, the People's Bank of China (PBOC) issued the Notice on Matters Concerning the Counter Business of the Interbank Bond Market to further expand the variety of over-the-counter bond investments and facilitate bond investment by residents and other institutional investors. Judging from past experience, the 2020 anti-epidemic special treasury bonds were allowed to be subscribed by individuals and micro, small and medium-sized enterprise investors, which strongly supported the rapid distribution of the special treasury bonds in that year.

2. Enhance the function of banks to support the financing of the real economy

For a long time, the mainland's financial system has been dominated by indirect bank financing. Commercial banks have played an irreplaceable and fundamental role in supporting the construction of major national infrastructure, supporting the development of the real economy, assisting in the issuance of treasury bonds, and promoting inclusive finance. However, in recent years, due to the accelerated narrowing of net interest margins, the growth rate of bank profits has declined, hindering their own endogenous capital replenishment and restricting banks from better playing their financing functions. Judging from the more than 20 listed banks that have disclosed their annual reports in the first quarter of 2024, more than 40% of the banks' capital adequacy ratios have declined to varying degrees. In order to alleviate this contradiction, we can make joint efforts in the areas of financial supervision, fiscal policy, and monetary policy. First, it is proposed to support commercial banks to expand the issuance scale of perpetual bonds and Tier 2 capital bonds, and enhance the financial strength of financial services to the real economy through exogenous supplements. Second, it is suggested that the central government should increase the quota of local special bonds, support local governments to increase the issuance of special capital bonds, and inject targeted capital into small and medium-sized banks such as urban commercial banks and rural commercial banks to help them speed up the "blood replenishment". At the same time, it is necessary to increase the use of structural monetary policy tools such as re-lending to support agriculture and small enterprises, inclusive small and micro loan support tools, and collateral supplementary loans (PSL), so as to further enhance the financial service capabilities of commercial banks in key areas such as agriculture, rural areas, small and micro enterprises, scientific and technological innovation, advanced manufacturing, and green development.

3. Promote the implementation of the trade-in policy for consumer goods in a multi-pronged manner

The first is to improve the recycling system. For the old goods in the trade-in, how to recycle and how to reuse has become the key. The reason why home appliance manufacturers and 4S stores are not enthusiastic about recycling is mainly due to the imperfect recycling system in the mainland and the lack of government subsidies and incentives. We should learn from the experience of developed countries and establish a sound recycling system for old things. The government should increase financial subsidies to manufacturers, and require manufacturers to set up special recycling departments through the establishment of incentive mechanisms and corresponding laws and regulations to cope with large-scale recycling needs. The second is to increase recycling subsidies for consumers. For each recycled vehicle, the 4S store should give an appraisal and give a price not lower than that of the second-hand car dealer. If the purchase of additional vehicles is increased by the family unit, the purchase tax will continue to be halved, and for the renewal or additional purchase of vehicles for pure electric vehicles, a subsidy of about 5,000 to 10,000 yuan will be given according to the standard. In cities where vehicle purchase is restricted, consideration can be given to pure electric second-hand car transactions, allowing licensed transfer and retaining the seller's new energy license plate for 3 to 6 months. The third is to give tax reductions, tax exemptions and excess financial subsidies to car companies and 4S stores that actively participate in recycling. In 2024, financial subsidies for the trade-in of cars and home appliances should be increased. It is estimated that the fiscal expenditure on the trade-in of consumer goods may reach 200 billion yuan, plus the incentives and subsidies for resource recycling and moderate individual income tax reductions and exemptions, which will stimulate the renewal demand of residents' durable consumer goods by about 400 billion yuan. Fourth, financial institutions should work together. Financial institutions design and launch auto credit consumer products. Commercial banks and auto finance companies are encouraged to provide differentiated auto credit products in terms of interest rates and account terms based on consumer credit status and vehicle models. Preferential interest rates or discounts will be given to replacement updates, especially fuel vehicles updated to new energy vehicles. Fifth, targeted policies are used to encourage manufacturers to increase R&D efforts. On the one hand, car companies should strengthen basic R&D and independent innovation to produce cost-effective automotive products, and home appliance manufacturers should develop more intelligent and green home appliances to attract and stimulate market consumer demand. On the other hand, car companies and home appliance manufacturers should also increase R&D efforts to improve the ability to turn old things into treasures.

4. Accelerate the development of service consumption with new ideas and new measures

Compared with physical consumption, service consumption is obviously different in many aspects such as demand type, supply mode, realization process, evaluation criteria and individual feelings, and it is necessary to expand service consumption with new ideas and new measures that are different from the development of physical consumption. The first is to take multiple measures to increase residents' disposable income, improve the security system, and enhance residents' service consumption capacity. The second is to accelerate the pace of new-type urbanization and expand the base and increment of the growth of service consumption demand. Third, we have steadily implemented the reform of the rural land system and greatly improved the consumption capacity of farmers' services. Fourth, reform the relevant tax system to enhance the willingness of middle and high-net-worth groups to consume. Fifth, strengthen the guarantee of service consumption, optimize the service consumption environment, and improve the service consumption experience. Sixth, relax the entry threshold of the service industry, promote the transformation and upgrading of the service industry, and cultivate new hot spots for service consumption. Seventh, increase the intensity and scope of tax and fee reductions in the field of public services. Eighth, speed up the process of building a systematic system for service consumption, and issue official statistics on service consumption.

5. Comprehensive measures to promote investment to improve quality and efficiency

The first is to promote the effective combination of investment and consumption. Compared with investment demand, consumption demand belongs to final demand, and consumption-led economic growth is reliable economic growth with market guarantees. By forming effective investment to meet the needs of consumption transformation and upgrading, we can optimize the supply structure, improve the quality of supply, enhance the adaptability of the supply system to domestic demand, and lead and create new demand with innovation-driven and high-quality supply. The second is to increase the participation of all social elements in investment. Give full play to the decisive role of the market and increase the enthusiasm of non-governmental organizations to participate in investment. On the one hand, it is necessary to improve the environment for private investment, stimulate the demand for private investment, and relax the field of private investment by improving the market environment and promoting supply-side structural reform. On the other hand, it is necessary to improve the public investment and financing system and broaden the channels for non-governmental investment. While rationally arranging the scale of local government special bonds, we should increase the number of PPP projects that are legal and compliant, and leverage social capital to enter major projects that make up for shortcomings. The third is to broaden the channels of financial support. It is necessary not only to play the role of credit in supporting infrastructure through indirect financing, but also to strengthen direct financing, to provide capital needs through common capital market instruments such as stocks and bonds, and to raise funds through various innovative market-oriented financing models. Specifically, such as the industrial fund and fund of funds model led by financial institutions or social enterprises, the crowdfunding model of equity investment funds or equity products, the income trust model, the financial leasing and asset securitization model, etc. Fourth, promote the development of domestic and international two-way investment through "dual circulation". On the one hand, we will accelerate the creation of a market-oriented, law-based and international business environment, improve the legal environment for foreign investment in China, further improve the negative list system, strengthen the protection of intellectual property rights, enhance investment confidence, attract high-tech investment, and build the free trade zone and free trade port into a new highland for attracting foreign investment. On the other hand, we will continue to promote Chinese enterprises to "go global" for overseas investment, which is also an important part of the formation of a new development pattern of "dual circulation" in the mainland. Expanding domestic and international two-way investment can play an important role in China's economic transformation and development to a high-quality one.

6. Promote exports by expanding high-level opening-up

Strengthen the connection and interaction of domestic and foreign industrial chains, establish overseas raw material processing and supply bases, and deeply participate in the global industrial division of labor and cooperation. While transferring the production of some low-end export commodities to the outside world, we will further consolidate and enhance the competitiveness of medium and high-end export commodities. Seize the new opportunities brought about by the adjustment of the global industrial structure and layout, stabilize the basic market for attracting foreign investment, optimize the structure of foreign investment, introduce policies to increase efforts to attract foreign investment involving high-tech and mid-to-high-end manufacturing, accelerate the green and digital transformation of foreign trade, actively promote the high-quality development of digital trade, and fully integrate digitalization into all aspects of the foreign trade industry. Promote the integrated development of industry and trade, and implement the strategy of excellence in and out. Vigorously develop service consumption, especially producer service consumption, and promote the high-quality development of service trade. Promote the high-quality development of new forms of foreign trade such as cross-border e-commerce.

7. Intensify policies to better meet residents' housing needs

Further lower the threshold for individual housing purchases, moderately adjust the mortgage interest rate, LPR and housing provident fund loan interest rates have room for adjustment. Commercial banks have maintained a relatively fast pace of personal mortgage placement. Local housing authorities should speed up the pace and cancel unnecessary purchase and sale restrictions, and large city banks should reduce the range of mortgage interest rates. First-tier and core second-tier cities will further relax the restrictive measures for the purchase of second-hand houses in urban areas, adjust the existing rules on the number of years of social security contributions, and expand or cancel the reference price range for second-hand housing transactions. Optimize fiscal and taxation policies to support individual housing purchase and affordable housing construction, appropriately reduce or exempt the tax requirements for affordable rental housing, appropriately adjust the tax rate of individual first home transactions, and reduce the deed tax rate.

8. Effectively increase the investment of financial resources and prudently handle the risks of real estate enterprises

Extend and expand the scale of special loans for guaranteed delivery of buildings, and increase the balance of loans for guaranteed delivery of buildings. In 2024, the scale of special loans related to guaranteed delivery of buildings will increase to more than 500 billion yuan. Moderately increase the tolerance of non-performing loans of real estate enterprises, and increase the proportion of development loans of commercial banks of real estate enterprises. Increase non-bank financial support, expand the scale of bond issuance, and allow some bonds to be used to repay debts. Explore publicly offered real estate REITs and speed up the approval and issuance of real estate REITs. Explore the establishment of a national real estate fund, the scale of which can reach one trillion yuan, to enhance market confidence. It is suggested that the central government should contribute capital as the initial capital of the fund, and the rest can be invested and invested by policy banks, large state-owned commercial banks, insurance companies, AMC asset management companies, etc., so as to deal with real estate financial risks in a systematic, medium and long-term manner.

Report Writers:

Lian Ping, President of Guangkai Chief Industry Research Institute

Liu Tao is the vice president of Guangkai Chief Industry Research Institute

Ma Hong, Senior Researcher of Guangkai Chief Industry Research Institute

Luo Huanjie is a senior researcher at Guangkai Chief Industry Research Institute