Text: Yan Xiang, Xu Ruchun
Investment Essentials
Since 2000, the inventory cycle of China and the United States has experienced five significant resonance upward movements. From the perspective of historical experience, there are three main factors driving the resonance of the inventory cycle between China and the United States. First, trade factors, after China's accession to the WTO in 2000, strong domestic and foreign demand drove China's rapid economic growth, which in turn injected new growth momentum into the global economy, and the resonance of Sino-US inventories rose; second, the spillover effect of unconventional policies, mainly reflected in China's "four trillion" after the 2008 financial crisis and the unconventional monetary policy of Western countries after the new crown epidemic in 2020; third, the synchronization of policies between China and the United States, behind the inventory resonance from 2013 to 2014 is China's "secondary stimulus" The third and fourth rounds of quantitative easing in the United States, the resonance of inventories from 2016 to 2018 is behind China's supply-side reforms and US tax cuts.
Judging from the current situation, in terms of domestic inventory, the year-on-year growth rate of finished product inventory of industrial enterprises is still hovering at the bottom. From the perspective of leading indicators, the upward inflection point of the revenue growth rate of industrial enterprises and the year-on-year growth rate of PPI has been clear, but whether it is the year-on-year growth rate of corporate revenue or PPI, the current recovery is not large. In terms of time, the current inventory cycle began at the beginning of 2020 and has lasted for more than 50 months. Therefore, we believe that the destocking stage of China's inventory cycle has basically ended, but because demand is still weak, the upward slope of the inventory cycle is relatively flat, and it is temporarily in the bottoming stage of the cycle. From a structural point of view, among the manufacturing enterprises, the inventory cycle of the consumer goods manufacturing industry and the raw material manufacturing industry is ahead of the equipment manufacturing industry.
In terms of U.S. inventory, the current U.S. inventory cycle is nearing the end of inventory depletion. In terms of time, as of January 2024, from August 2020 to the present, the current round of inventory cycle has lasted for 42 months, exceeding the average length of the past nine rounds of inventory cycles, and in terms of location, in January 2024, the year-on-year growth rate of U.S. commercial inventory is 0.41%, located at 13.4% From the perspective of leading indicators, in addition to retailers, the low point of the year-on-year sales growth rate of manufacturing and wholesalers in the month will appear in 2023, and the year-on-year growth rate of retailer sales will decline to a low of -0.42% in January 2024, but from the trend point of view, the year-on-year sales growth rate of the three major merchants is currently at the bottom of the shock. Structurally, from the perspective of the sub-sectors of U.S. manufacturers, except for furniture, food, leather, paper products, chemical products, and plastics and rubber, the inventory growth rate of other sub-sectors has rebounded slightly;
To sum up, the current inventory cycle in China and the United States is close to the bottom moment or the end of destocking, and whether there can be a resonant upward trend in the future depends on whether there can be a significant upward trend in demand. Considering the sharp pullback in Fed rate cut expectations after the release of the March CPI data, the resonance replenishment of China and the United States is expected to appear in the second half of the year.
Risk warning: macro changes exceed expectations, overseas markets fluctuate sharply, financial risk events break out, etc.
The main body of the report
1 Thematic Spotlight: The Possibility of Resonance in the U.S.-China Inventory Cycle
Since 2000, the inventory cycle of China and the United States has experienced five significant resonance upward movements, namely from 2002 to 2004, from 2009 to 2011, from 2014 to 2016 to 2017, and from 2020 to 2022.
At the beginning of the 21st century, the resonance of the inventory cycle in the United States and the United States appeared after China's accession to the WTO. After China's accession to the WTO in 2001, China's exports grew rapidly, China's economy entered a period of rapid growth, and the strong domestic and foreign demand drove enterprises to have a strong willingness to replenish the warehouse, and the rapid growth rate of China's industrial enterprises' inventory continued until the end of 2004. China's rapid economic growth has injected new growth momentum into the global economy, and the loose financial environment has pushed the U.S. real estate industry to continue to rise, and U.S. companies have entered a new round of replenishment cycle since 2002. (It should be noted that the growth rate of Sino-US inventories from 2002 to 2004 has not always been synchronized upward, and there was a brief adjustment in the growth rate of U.S. inventories in 2003, but because the inventory growth rate entered an upward channel again in 2004 and soon exceeded the high point in 2003, this paper regards the end of 2002 to the end of 2004 as the first resonant rise stage of the Sino-US inventory cycle)
The resonant upward trend of the second inventory cycle in China and the United States occurred after the 2008 financial crisis. In order to resist the impact of the financial crisis on the economy, the mainland's economic policy was fully relaxed in the second half of 2008, and in November the executive meeting of the State Council launched a series of economic stimulus plans; the meeting draft mentioned that "the preliminary calculation is that about 4 trillion yuan will be invested by the end of 2010 to implement the above-mentioned project construction", and the "four trillion yuan plan," which is hailed as the largest economic stimulus plan in history, was officially introduced. Thanks to the improvement of the international economic situation and the stimulus of U.S. monetary and fiscal policies, the U.S. economy has also improved since the second half of 2009, and from the second half of 2009 to 2011, the inventory cycle of China and the United States has seen a significant resonance upward movement.
Behind the resonant upward movement of the third inventory cycle between China and the United States is the "secondary stimulus" of the third and fourth rounds of quantitative easing in the United States and China. In September and December 2012, the United States launched the third and fourth rounds of quantitative easing. At the same time, in 2012, with the rapid decline in economic growth, the Chinese government adopted a "new round" of economic stimulus policies, including two RRR cuts, two interest rate cuts, and the approval of a large number of investment projects. The inventory cycle of China and the United States began to resonate upward from the fourth quarter of 2013, but whether it is from the magnitude or from the duration, the recovery momentum of the current round of the inventory cycle between China and the United States is not strong, probably around the middle of 2014, the inventory cycle between China and the United States began to enter the stage of destocking.
The fourth round of simultaneous inventory growth between China and the United States lasted from the end of 2016 to mid-2018. At that time, the background was that China was undergoing supply-side structural reforms, the liquidation of excess capacity led to higher prices, nominal economic growth began to pick up, corporate profits improved, and enterprises began to enter a new round of replenishment cycle in the second half of 2016; In 2018, the Sino-US trade friction continued to recur, and China's inventory cycle entered a stage of continuous destocking until the outbreak of the new crown epidemic.
After the new crown epidemic in 2020, stimulated by the unconventional monetary policy of the United States, the inventory cycle of China and the United States resonated upward again. The economic impact of the pandemic in 2020 was also huge, but unlike in 2008, this unprecedented round of monetary liberalization occurred in Western countries rather than China. After the outbreak of the new crown epidemic, Western countries represented by the United States generally adopted extremely loose monetary policies, including zero interest rates and unlimited quantitative easing, and by the beginning of 2021, the year-on-year growth rate of M2 in the United States was at a maximum of nearly 27%, the highest level since historical data began in 1960. Since the third quarter of 2020, the global economy has recovered rapidly, and the inventory growth rate in both China and the United States has risen significantly.
From the perspective of historical experience, there are three main factors driving the resonance of the inventory cycle between China and the United States. First, trade factors, after China's accession to the WTO in 2000, strong domestic and foreign demand drove China's rapid economic growth, which in turn injected new growth momentum into the global economy, and the resonance of Sino-US inventories rose; second, the spillover effect of unconventional policies, mainly reflected in China's "four trillion" after the 2008 financial crisis and the unconventional monetary policy of Western countries after the new crown epidemic in 2020; third, the synchronization of policies between China and the United States, behind the inventory resonance from 2013 to 2014 is China's "secondary stimulus" The third and fourth rounds of quantitative easing in the United States, the resonance of inventories from 2016 to 2018 is behind China's supply-side reforms and US tax cuts.
Judging from the current situation, in terms of domestic inventory, the year-on-year growth rate of finished product inventory of industrial enterprises is still hovering at the bottom. In July 2023, the growth rate of finished goods inventories of industrial enterprises bottomed out and then rebounded slightly, but due to weak demand, there has been a recurrence since then. According to the latest data released by the Bureau of Statistics, in February 2024, the year-on-year growth rate of finished goods inventory of industrial enterprises above designated size was 2.4%, which has not yet increased significantly, and the inventory growth rate has bottomed out.
From the perspective of leading indicators, the upward inflection point of the revenue growth rate of industrial enterprises and the year-on-year growth rate of PPI has been clear. Past inventory experience shows that the growth rate of corporate revenue and the upward inflection point of PPI are ahead of the inventory cycle. The bottom of the year-on-year growth rate of the current round of PPI in mainland China appeared in June 2023, and the low point of revenue growth appeared at the beginning of 2023, and it was repeated in the middle of 2023. However, whether it is corporate revenue or PPI year-on-year growth, the current recovery is not large, the year-on-year growth rate of PPI in March 2024 is still -2.8%, and the cumulative growth rate of corporate revenue in February 2024 is only 4.5% under the low base last year.
In terms of time, in the past six rounds of inventory cycles in the mainland, each cycle lasted for a minimum of 30 months and a maximum of 48 months, with an average length of 39.3 months. The current inventory cycle began in early 2020 and has lasted for more than 50 months.
Therefore, we believe that the destocking stage of China's inventory cycle has basically ended, but because demand is still weak, the upward slope of the inventory cycle is relatively flat, and it is temporarily in the bottoming stage of the cycle.
From a structural point of view, among the manufacturing enterprises, the inventory cycle of the consumer goods manufacturing industry and the raw material manufacturing industry is ahead of the equipment manufacturing industry. In February 2024, the year-on-year growth rate of finished goods inventory in the raw material manufacturing industry was 1.6%, up 5.2 percentage points from the low point of -3.6% in July 2023, the year-on-year growth rate of inventory in the consumer goods manufacturing industry was 4.1%, a slight increase of 1.6 percentage points from the low point of 2.5% in July 2023, and the year-on-year growth rate of inventory in the equipment manufacturing industry was 3.0%, still in a downward channel.
From the perspective of subdivided industries, in addition to the low point of inventory growth in non-ferrous metal smelting and processing industry in the raw material manufacturing industry is not clear, the inventory growth rate of other sub-sectors has rebounded recently, especially the inventory growth rate of petroleum, coal and other fuel processing industries and ferrous metal smelting and rolling processing industry has increased significantly compared with the low point of last year.
Most of the sub-sectors in the consumer goods manufacturing industry have entered the replenishment cycle, especially the wine and beverage and refined tea manufacturing, the textile industry, and the chemical fiber manufacturing industry, and the inventory growth rate is in the historical quantile of more than 40%;
Most sub-sectors of the equipment manufacturing industry are still in the stage of inventory depletion, and the inventory growth rate of automobile manufacturing, electrical machinery and equipment manufacturing, computer communication and other electronic equipment manufacturing, and instrument manufacturing is still declining. The inventory growth rate of the metal products industry has risen slightly.
In terms of U.S. inventory, the current U.S. inventory cycle is nearing the end of inventory depletion. In terms of time, as of January 2024, from August 2020 to the present, the current round of inventory cycle has lasted for 42 months, exceeding the average length of the past nine rounds of inventory cycles, and in terms of location, in January 2024, the year-on-year growth rate of U.S. commercial inventory is 0.41%, located at 13.4% From the perspective of leading indicators, in addition to retailers, the low point of the year-on-year sales growth rate of manufacturing and wholesalers in the month will appear in 2023, and the year-on-year growth rate of retailer sales will decline to a low of -0.42% in January 2024, but from the trend point of view, the year-on-year sales growth rate of the three major merchants is currently at the bottom of the shock.
From the perspective of the sub-sectors of U.S. manufacturers, except for furniture, food, leather, paper products, chemical products, and plastics and rubber, the inventory growth rate of other sub-sectors has rebounded slightly;
To sum up, the current inventory cycle in China and the United States is close to the bottom of the moment or the end of the destocking, whether the subsequent resonance upward depends on whether the demand can rise significantly, considering the March CPI data after the release of the Fed interest rate cut expectations of a sharp pullback, the resonance replenishment of China and the United States is expected to appear in the second half of the year.
2 Risk Warning
Macro changes exceed expectations, overseas markets fluctuate sharply, financial risk events break out, etc.
This article is excerpted from the report "Macro Weekly: The Possibility of Resonance in the U.S.-China Inventory Cycle" released by Huafu Securities Research Institute on April 15, 2024.
Analyst:
燕翔, S0210523050003
许茹纯, s0210523060005
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