Institute of Finance, Chinese Academy of Social Sciences: The economic and financial cycle is dislocated, and macroeconomic policies should pay more attention to sustainability

"The root cause of the current divergence between economic data and financial data lies in the dislocation of the economic and financial cycles, and fiscal expansion and policy finance have provided important support for economic recovery. On April 23, the macro financial analysis team of the Institute of Finance and Economics of the Chinese Academy of Social Sciences said in the first quarter report of "China's Macro Financial Analysis" that the mainland is in the downward stage of the financial cycle, although the monetary policy maintains a "stable and loose" tone, but the lack of endogenous economic momentum has led to the poor transmission of easy money to easy credit.

In the first quarter, the mainland's GDP grew by 5.3%, exceeding market expectations, while new social finance and credit increased slightly year-on-year, especially the poor structure of social finance and credit.

According to the analysis of the report, the price and financial data in the first quarter were less than expected, resulting in a widening of the "temperature gap" between the macro data and the micro feeling, which is mainly reflected in: first, the recovery of demand lags behind the recovery of supply, and the lack of effective demand causes prices to continue to run at a low level; second, the medium and long-term credit growth of households and enterprises is weak, and the downward trend of M1 growth has not been reversed.

"The key to mitigating the negative impact of the downturn in the financial cycle on economic growth lies in repairing the balance sheets of market entities and restoring the ability to create credit, so as to create a good monetary and financial environment for the economic recovery. The report said.

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The economic and financial cycles are misaligned

According to the first-quarter financial data released by the central bank, the increase in social financing in the first quarter of this year was 12.93 trillion yuan, 1.61 trillion yuan less than the same period last year, of which RMB loans to the real economy increased by 9.11 trillion yuan, a year-on-year decrease of 1.59 trillion yuan. RMB loans increased by 9.46 trillion yuan in the first quarter, 1.14 trillion yuan less than the same period last year.

While social finance and credit showed a small year-on-year increase, the year-on-year growth rates of M2 and M1 both fell, reaching 8.3% and 1.1% respectively at the end of March. According to the analysis of the above-mentioned report, there are three main reasons for the decline in M2 growth: first, the slowdown in credit expansion, which leads to the weakening of the ability to derive money; second, the slow progress of fiscal expenditure, which reduces the liquidity of the banking system; and third, the central bank has strengthened the monitoring of the problem of capital idling, and the M2 growth rate tends to converge.

"The root cause of the divergence between the current economic data and the financial data lies in the dislocation of the economic and financial cycles. According to the report, the results of financial cycle calculation (BP filtering method and principal component analysis method) show that since 2018, the mainland's financial cycle has entered a downward stage, with falling housing prices and tightening credit being the leading factors in the downward trend of this financial cycle, while the economic cycle reflected by GDP growth has been in a state of shock and rebound since 2023.

The report also analyzes that there are two reasons for the dislocation of the current economic and financial cycle: first, the continuous decline in prices has led to the rise in real interest rates, which has increased the financing costs and debt repayment pressure of market players, and the decline in housing prices has caused the value of assets and collateral to shrink, which has restricted the progress of balance sheet repair, and second, the nominal GDP growth rate is low (4.0% in the first quarter of 2024, lower than 4.7% in the whole of 2023) The large gap between the growth rate of real GDP and nominal GDP affects micro perception and market confidence, while weak expectations are an important factor restricting the expansion of balance sheets, resulting in weak endogenous momentum of credit growth.

On the one hand, manufacturing investment is mainly driven by policy finance and is less sensitive to changes in housing prices and credit environment, and on the other hand, the central government has leveraged to support infrastructure investment to remain resilient.

In 2023, the central government will issue 1 trillion yuan of special treasury bonds, and by February this year, all the funds have been implemented for 15,000 specific projects, more than half of which will be used for the construction of flood control and drainage and other related water conservancy facilities. In the first quarter, the investment in the production and supply of electric heating and burning water increased by 29.1% year-on-year, and the investment in water conservancy management increased by 13.9% year-on-year, which is the main driving force for the growth of infrastructure investment.

Macroeconomic policies should pay more attention to sustainability

"Balance sheet repair has become key to determining the turn of the financial cycle and the course of economic recovery, and it also represents a medium- to long-term economic growth driver. "The report believes that the current balance sheets of households and enterprises are showing signs of repair, but the strength is weak, and the downward trend of the financial cycle is difficult to reverse in the short term.

The analysis results of the report show that the profit improvement of new quality productivity-related industries is more obvious, including general equipment manufacturing and automobile manufacturing, which show strong profit growth resilience, and the profit growth rate of equipment manufacturing (especially railway, shipbuilding, aerospace and other transportation equipment manufacturing) and high-tech manufacturing industry has rebounded greatly, which has become the main driving force for the profit growth of industrial enterprises.

In order to consolidate and enhance the upward momentum of the economy, the report suggests that macro policies should continue the tone of expansion, pay more attention to sustainability, and help market players repair their balance sheets and stabilize and rebound in the financial cycle.

First, the proactive fiscal policy should be moderately strengthened, taking into account both stable growth and risk prevention. The first is to maintain the necessary level of fiscal deficit ratio, mainly by the central government to increase leverage, through transfer payments to local governments to reduce the pressure on local debt repayment. The second is to give full play to the countercyclical regulation and control of treasury bonds and the function of safe assets, and increase the supply of safe assets such as treasury bonds is conducive to alleviating the impact of lack of confidence on the real economy and risk assets under the condition of lower bank deposit interest rates and cooling of market risk appetite. Third, the government should strengthen its support for the construction of affordable housing, the construction of public infrastructure for both ordinary and emergency purposes, and the transformation of urban villages, so as to make up for the gap in real estate investment and increase infrastructure investment, which will help to coordinate and resolve the risks of real estate and local bonds.

Second, monetary policy should be more anchored to the price target, and make good use of the room for RRR and interest rate cuts. At present, maintaining price stability and promoting a moderate recovery in prices should be regarded as an important consideration of monetary policy, so that the nominal economic growth rate can return to above the real economic growth rate as soon as possible. First, we should maintain a reasonable growth in aggregate, reduce the RRR in a timely manner to supplement the medium and long-term liquidity of the banking system, and ease the pressure on the narrowing of banks' net interest margins. Second, interest rates will continue to be cut by a large margin, which will promote the steady and moderate decline in the comprehensive financing cost of the real economy and boost the endogenous growth momentum of the economy. The third is to increase financial support for large-scale equipment renewal and trade-in of consumer goods, and continue to support private capital to participate in major projects through policy-based development financial instruments, so as to form a virtuous circle in which consumption and investment promote each other.

Third, we should take multiple measures to stabilize the real estate market and promote the real estate industry to achieve a soft landing. The real estate market is still the main force dragging down the current economic recovery, and it is necessary to further improve relevant regulatory policies from both the supply and demand ends. The first is to continue to relax and gradually cancel the real estate restrictions introduced in the non-core areas of first-tier cities during the overheating period, reduce the interest rate of existing housing loans and the cost of buying a house, and support the release of rigid and improved housing demand. The second is to accelerate the implementation of the urban real estate financing coordination mechanism, support the reasonable financing needs of real estate enterprises under different ownership systems without discrimination, and avoid the liquidity difficulties of real estate enterprises from evolving into systemic financial risks. The third is to provide medium and long-term low-cost financial support for the construction of the "three major projects" such as affordable housing, improve the housing rental financial policy system, and promote the construction of a new model of real estate development.

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