· The full text is 2600 words in total and takes about 6 minutes in length
· Source of this article: Liu Shengjun's overall view (produced by Liu Shengjun Micro Finance)
Text: Liu Shengjun
China's economy grew 5.3 percent year-on-year in the first quarter. It must be known that the previous forecasts of major institutions for the growth rate in the first quarter were generally below 5%. Sure enough, after the release of the data, major institutions have "responded" to the upward revision of China's economic forecasts for 2024.
It is worth noting that the capital market did not reflect the excitement that should be "beyond expectations". This reminds us that there are details in the first quarter data that are worth digging into.
First, the source of power beyond expectations
The growth rate in the first quarter exceeded expectations, and several of the driving forces were particularly prominent:
1. Industry-led: In the first quarter, the industrial added value increased by 6%, contributing 37.3% to GDP growth, driving nearly 2 percentage points of GDP growth. Behind the industrial acceleration is the "money-making effect": from January to February, the profits of industrial enterprises above the designated size increased by 10.2% year-on-year, a significant improvement compared with the decline of 2.3% in 2023.
2. Export rebound: Imports and exports increased by 5% in the first quarter, a new high in six quarters. The contribution of net exports to economic growth turned to 14.5% from -3.1% in the fourth quarter of 2023, driving GDP growth by 0.8 percentage points in the quarter. In the first quarter, China's exports increased by 1.5% year-on-year in US dollar terms (significantly higher than -4.6% in 2023 as a whole), and the actual export volume increased by about 15% excluding the impact of exchange rate fluctuations.
3. Price factors: The nominal GDP growth rate in the first quarter was only 4.2% year-on-year, 1.1 percentage points lower than the real GDP growth rate, which means that a considerable part of the real GDP growth rate was contributed by the decline in prices.
The stakes are high. In economic life, people perceive nominal variables, such as wages, fiscal revenues, corporate profits, etc. We compare two scenarios: A) 10% wage growth, 5% inflation, and 5% real wage growth; b) Wages do not grow, prices fall by 5 per cent, real wages increase by 5 per cent. Although real wages have increased by the same rate, in reality Scenario A feels much better than that of B, which is called the "monetary illusion".
Compare two scenarios: C) Prices rise by 5%, wages rise by 7%, employees are happy, but real wages rise by only 2%; D) If prices drop by 5% and the company lowers wages by 3% and then tells employees that your wages have actually increased by 2%, it is very difficult for employees to accept. This is called "wage rigidity", which means that it is difficult for employees to accept a reduction in nominal wages.
Because of the monetary illusion and wage rigidity, moderate inflation is more conducive to the formation of optimistic social expectations than deflation. The GDP contraction index (the difference between nominal and real GDP growth) was -1.1% in the first quarter, which has been negative in five of the last six quarters, almost the longest period of deflation in history. This is one of the most alarming red flags for the first quarter data.
In addition, the Bureau of Statistics revised down the historical data on fixed asset investment and some real estate activities for the same period in 2023. Among them, the absolute base of fixed asset investment in the first quarter of 2023 will be revised down by 11%, and the absolute base of real estate investment and sales area will be revised down by about 6%.
2. The problems and challenges behind exceeding expectations
1. Structural contradictions are still prominent. Sheng Laiyun, a spokesman for the National Bureau of Statistics, pointed out that "from the perspective of the degree of recovery, we find that the recovery of demand is not as good as production, and the recovery of micro, small and medium-sized enterprises is not as good as that of large enterprises, so there is an obvious imbalance in the economic recovery, so everyone may have a certain understanding of the data." The industrial capacity utilization rate in the first quarter was only 73.6%, the lowest since the second quarter of 2020.
2. The surge in the "new three" may trigger new trade conflicts. In 2023, the export of the "new three" (new energy vehicles, photovoltaic products, and lithium batteries) will exceed 1 trillion yuan for the first time, an increase of nearly 30%. In the first quarter of 2024, the output of new energy vehicles will increase by 29.2%, solar cells will increase by 20.1%, and the growth rate of polycrystalline silicon and monocrystalline silicon related to photovoltaics will still be as high as more than 50%. China's global lead in the field of new energy is so significant that Musk said. After the Q1 data came out, Musk announced: he wants Tesla to cut 20% of its workforce because its quarterly car deliveries fell by 20%.
We should be proud of the advantages of new energy, but we should also be wary of triggering a new wave of protectionist sentiment: the European Union has launched an anti-dumping investigation into Chinese automobiles, and Yellen visited China to talk about "overcapacity". For the upcoming election, Biden actually cheekily grabbed the card of "tariff man" Trump: proposed tariffs on Chinese steel and aluminum.
3. Real estate is the biggest drag: the particularity of real estate lies in the fact that it is highly correlated with economic growth, local finance, and residents' wealth. The impact of the real estate downturn is all-round and coercive. In the first quarter, the country's fixed asset investment grew by 4.5 percent, while real estate development investment fell by 9.5 percent. Real estate indicators continued to decline, with sales falling more than floor space sold, indicating that house prices continued to fall.
Although the "three major projects" (affordable housing construction, "level-emergency dual-use" public infrastructure construction, and urban village transformation), as a breakthrough in building a new model of real estate development, drove real estate development investment by 0.6 percentage points in the first quarter, their volume was not enough to stabilize the overall trend of real estate.
Attention must be paid to this problem: 1) 70% of residents' wealth is concentrated in real estate, and if real estate is unstable, consumer confidence will be unstable; 2) residents buy houses, and there is a psychological inertia of buying up but not buying down; 3) if only the purchase restrictions are lifted, unstable developers, residents are worried that the real estate will not be finished, and they still dare not buy houses.
Real estate has moved from the first stage of the Evergrande thunderstorm and the second stage of the Country Garden thunderstorm to the third stage of the Vanke thunderstorm, and its danger is self-evident. It is necessary to prevent the real estate from moving from adjustment to loss of confidence.
4. Private investment is still low: In the first quarter, private investment increased by 0.5% year-on-year, lower than the growth rate of overall investment of 4.5%. Although private investment excluding real estate development investment increased by 7.7%, it was still lower than the 9.3% growth rate of overall investment after real estate deduction. The necessity of boosting private investment lies in the fact that private investment is the main force in absorbing new jobs, and 80% of the new jobs depend on private investment.
5. Consumption is the pinnacle: In 2023, the contribution rates of final consumption expenditure, gross capital formation, and net exports to economic growth will be 82.5%, 28.9%, and -11.4%, respectively. In the first quarter of 2024, the total retail sales of consumer goods will grow by 4.7%, and the contribution rate of consumption to GDP growth will be 73.7%. In the first quarter, the marginal propensity to consume was 63.3%, the highest in the same period since the epidemic in 2020, and although the "scarring effect" has eased, it is still significantly lower than the level of more than 65% in the same period before the epidemic.
6. The latest "Macro Leverage Ratio for the First Quarter of 2024" released by the National Finance and Development Laboratory pointed out that "although the overall debt growth rate continued to decline, the macro leverage ratio still increased by 6.8 percentage points in the first quarter." The main reason for the increase in leverage is still the larger-than-expected decline in nominal GDP growth. "Nominal GDP rose by only 4.2% in a single quarter, which has been lower than real GDP growth for four consecutive quarters. China's economy is faced with the dual challenge of stabilizing growth and improving the quality of growth, which is not easy.
III. Conclusions and Recommendations
The data of the first quarter confirms several key points that the author has been calling for for a long time:
1. The core of stabilizing the economy is: stabilizing consumption, stabilizing private enterprises, and stabilizing real estate
2. To stabilize consumption, a large amount of consumption vouchers (10 trillion level) is needed
3. Deflation is dangerous, but the key to preventing deflation is not monetary stimulus, but to boost consumer demand
4. To stabilize real estate, it is necessary to make simultaneous efforts on the supply side (to stabilize developers) and the demand side (to release purchase restrictions).
5. The key to stabilizing private enterprises lies in the "competition-neutral" oriented reform
6. Whether the "negative feedback loop" can be broken is still the key point, and it is important to grasp the "time window".
Do it and cherish it.
Liu Shengjun
Economists who insist on telling the truth
Political Economy + Big Historical View
In 2014, he participated in the Prime Minister's Economic Symposium
Liu Shengjun is the founder of Micro Finance
Member of the Shanghai Economic Committee of the Zhi Gong Party
Chief expert of Shandong Provincial Human Resources Development Promotion Association
Author of "The Next Decade"
Shandong Heze Dingtao people