China's economy is off to a good start in 2024, with industrial production, service consumption and manufacturing investment being the main supports, but weaker-than-expected price and financial data have widened the "temperature gap" between macro data and micro feelings.
On April 23, the Institute of Finance and Economics of the Chinese Academy of Social Sciences released the "China Macro Financial Analysis for the First Quarter of 2024" (hereinafter referred to as the "Report"), pointing out that the widening of the "temperature difference" is mainly reflected in two aspects: 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 sluggish, and the downward trend of narrow money (M1) growth has not been reversed.
The analysis team suggests that macro policy in 2024 should continue the expansionary tone and pay more attention to sustainability, helping market players repair their balance sheets to promote economic recovery. The central government has moderately increased leverage to give full play to the countercyclical regulation and control functions of treasury bonds and safe assets; monetary policy has been more anchored to the price target, and the reserve requirement ratio has been cut in a timely manner and interest rates have been cut by a relatively large margin; both supply and demand have continued to make efforts to stabilize the real estate market, and "real money" has boosted the confidence of home buyers and real estate enterprises.
The economic and financial cycles are misaligned
China's economy is off to a good start in 2024, with GDP growth exceeding expectations of 5.3% in the first quarter, supported by industrial production, service consumption and manufacturing investment.
But price data and financial data fell short of expectations. In March, the CPI rose by 0.1% year-on-year and decreased by 1% month-on-month, and the sluggish recovery of commodity consumption offset the pull of the recovery of service consumption on prices to a certain extent; from the perspective of financial conditions, although the total amount of social finance and credit in the first quarter increased less than that of the same period last year, it was still higher than that of the same period in previous years, but from the structural point of view, the overall structure of social finance and credit was not good.
Why is there a periodic divergence between economic data and financial data? The root cause lies in the dislocation of economic and financial cycles.
According to the report, the mainland is currently in the downward stage of the financial cycle, the transmission of easy money to easy credit is not smooth, and fiscal expansion and policy finance have provided important support for economic recovery.
According to reports, the results of the financial cycle calculated by the institute based on the ratio of credit to GDP, the average sales price of commercial housing and the quarterly data of the Shanghai Composite Index show that since 2018, the mainland's financial cycle has entered a downward phase, and the decline in housing prices and the tightening of credit are the leading factors in the downward trend of this round of financial cycle. If the real GDP growth rate is simply used to reflect the economic cycle, since 2023, there has been a significant divergence between the economic growth rate and the continued downward trend of the financial cycle. Against the backdrop of the dislocation of the economic cycle, the economic recovery in the first quarter of 2024 was mainly driven by manufacturing and infrastructure investment, supported by policy-based financial and fiscal expansion.
Among them, the advantage of policy finance is that it leverages credit supply through monetary and fiscal linkage, which effectively hedges the credit contraction caused by the downturn in the real estate market. The central government has strengthened leverage to support infrastructure investment to remain resilient, but due to the slowdown in bond issuance and the constraints of debt policy, the supporting role of local financial resources in infrastructure investment has weakened.
The specific performance is as follows: first, the progress of the staggered issuance of special bonds and treasury bonds has slowed down, with 634.1 billion yuan of new special bonds added in the first quarter, only 16.3% of the annual issuance target has been completed; second, in 2024, the maturity of urban investment bonds will usher in a peak, and the net financing scale in the first quarter will turn from positive to negative, a decrease of 506.1 billion yuan over the same period last year.
Make good use of the space for RRR and interest rate cuts
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.
According to the report, in the first quarter of 2024, the economic cycle characterized by real GDP growth has shown positive signals, while the financial cycle dominated by credit and housing prices is still bottoming out. The large gap between the growth rate of real GDP and nominal GDP will affect micro perception and market confidence, and weak expectations are an important factor restricting the expansion of balance sheets, resulting in weak endogenous momentum of credit growth. As a result, balance sheet repair has become key to determining the turn of the financial cycle and the process of economic recovery, as well as representing a medium- to long-term economic growth driver.
The data showed that real GDP growth exceeded expectations in the first quarter, but nominal GDP growth was still low, at only 4.0% in the first quarter, far lower than the 4.7% level for the whole of last year.
"Credit expansion depends on the level of interest rates and the value of collateral, and the current low prices that lead to higher real interest rates, combined with the shrinkage of collateral due to falling house prices, are constraining the pace of balance sheet repair. Cao Jing, an associate researcher at the Institute of Finance of the Chinese Academy of Social Sciences, explained.
The "Report" points out that at present, the progress of repairing the balance sheets of residents and enterprises is mixed: the growth rate of residents' deposits has declined, and some of them have been diverted to national bonds, but the growth rate of residents' housing loans has continued to be negative, and the growth rate of consumer loans and operating loans has also dropped sharply; after excluding the low base effect, the profit recovery of industrial enterprises is not optimistic, but the profit improvement of industries related to new quality productivity is more obvious.
For the next stage of policy recommendations, the report emphasizes 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 active fiscal policy should be moderately strengthened, maintain the necessary level of fiscal deficit, mainly by the central government to increase leverage, give full play to the counter-cyclical regulation and control of national bonds and the function of safe assets, and the fiscal should step up efforts to support the construction of the three major projects, make up for the gap in real estate investment, and increase infrastructure investment.
Zhang Ming, deputy director of the Institute of Finance and Economics of the Chinese Academy of Social Sciences, believes that there are two important points to stabilize the financial cycle, one is the trend of inflation, and the other is the price of collateral. Therefore, it is necessary to curb the rise of real interest rates by cutting interest rates by a larger margin, or even to lower them; second, it is necessary to do everything possible to stabilize real estate prices and maintain the relative stability of collateral values.
"Of course, the issuance of additional treasury bonds is actually to provide new collateral in the financial system, from this point of view, the issuance of additional treasury bonds has three benefits, one is to help the government finance, the second is to bring more high-quality collateral to financial enterprises, promote the development of the financial market, and the third is to help promote the internationalization of the RMB. Zhang Ming said.
In terms of monetary policy, the report suggests that more price targets should be anchored and the room for RRR and interest rate cuts should be fully utilized. In terms of aggregate volume, we will maintain a reasonable growth, reduce the reserve requirement ratio in a timely manner to replenish the medium- and long-term liquidity of the banking system, continue to cut interest rates by a relatively large margin, and boost the endogenous growth momentum of the economy.
(This article is from Yicai)