Guo Lei | China's economic short-term cyclical position: supply clues and demand clues

Guo Lei is the chief economist of GF Securities and a director of the China Chief Economist Forum

The 2021 China Chief Economist Forum and the 1st Greater Bay Area (Huangpu) Economic Summit were held in Guangzhou from October 21 to 22. The theme of this forum is "New Global Order and China's New Pattern".

On the afternoon of October 21, Guo Lei, director of the China Chief Economist Forum and chief economist of GF Securities, made a keynote speech entitled "The Short-term Position of China's Economy: Supply Clues and Demand Clues". The following is the full text of the speech:

From a short-term cyclical perspective, how do we view China's economy? What will happen in the next three to four quarters?

First of all, let's look at the trend of China's economy this year. This year, China's economic growth is facing a relatively low base, so the entire economic data is not intuitive, such as 18.3% in the first quarter, and it is expected to be around 8% for the whole year, which is intuitively not easy to understand.

How is economic growth measured this year? One method commonly used by macro researchers is called the two-year average, which is to skip the low base in 2020 and make a geometric average based on 2019. China's two-year average growth was 5.0 percent in the first quarter, 5.5 percent in the second quarter, and 4.9 percent in the third quarter.

The third quarter of this year is facing a variety of supply-side disturbances, one is the continuous regional epidemic in July and August, affecting the rhythm of the economy, especially the service industry. The second is the flood situation, from the end of July to August, the impact of flood disasters is relatively large. The added value of our normal province accounts for almost 1/20 of the country, that is, 5%, if it is affected by a relatively large supply impact in a short period of time, the impact on the national data is still relatively large. The third is "double reduction", we have a far-reaching standardization of the education and training industry, which has an impact on short-term data, especially the service industry. The fourth is to limit production and power.

In the opinion of researchers, there are two reasons for this round of power curtailment, one is that the supply of coal is not enough, the entire industrial added value in the first three quarters of this year increased by nearly 12%, but the domestic coal production is only less than 4%, imported coal is about 4%, and this year's hydropower and wind power are also small years, and the hydropower growth in the first 9 months is negative 1%, the lowest growth rate in the past decade. It's a chain. Second, the proportion of the entire GDP secondary industry this year is too high, in the past, the proportion of the tertiary industry in GDP will basically rise every year, but the proportion of the secondary industry in THE GDP in the first half of this year has risen abnormally, especially in the industrial sector, the entire proportion has increased by about 2 points, which is easy to ignore. The electricity consumption of industrial units is equivalent to several times that of the service industry, and under this structure, the entire unit energy consumption is under great pressure. So, why is there an increase in the proportion of industry's GDP this year? Mainly because exports are too good, the export growth rate in the first three quarters was more than 30%.

Along this line, the supply and demand gap in the subsequent upstream will most likely be alleviated, and one supply will improve, especially after October, the coal supply has gradually increased. In September, coal imports rose sharply month-on-month, and the supply of subsequent coal should gradually rise. Second, with the slowdown of the entire economy and the repair of the service industry, the GDP structure will slowly be optimized, so in the short term, I tend to think that the entire supply-demand imbalance in the upstream has passed the most significant period.

But if we look longer, the price elasticity and hub of the upstream over the next five to ten years may be significantly higher than in the past decade.

The trend of commodities is basically a cycle every ten years. For example, in the 1990s, the global manufacturing industry adjusted, mainly the Internet drove the economy, and commodities oscillated downwards, all the way to the science and technology network bubble. From 2000 to 2010, the bulk was a bull market, mainly in the context of China's accession to the WTO, our industrialization, accompanied by the expansion of consumption in Europe and the United States. 2010 to 2020 is a deflationary cycle, commodity oscillations downwards, mainly in the context of China's construction and manufacturing overcapacity, Europe and the United States resident sector deleveraging.

The future could be different.

First, the typical capacity process process is likely to be over by now. Now the statistics bureau statistics of the upstream of the entire industry capacity utilization rate, most of which is between 75 and 80, and the supply and demand side is slightly turbulent, the price elasticity will be very large, which is typical is not like a sign of overcapacity, it is likely that there is no way to recover the capacity statistics inside, in other words, there is no typical overcapacity.

Second, in the next decade, carbon neutrality, the clean energy plan will further promote supply contraction.

Third, unlike the past decade, which is light on assets, for China and the United States, the manufacturing industry is once again moving towards the center, which means that the demand for upstream resources will rise.

Finally, if humanity finally emerges from the pandemic, there will be an increase in capital expenditure.

So looking at the next five to ten years, I tend to think that the whole upstream commodity is different from the last decade, and its elasticity and hub will become larger.

In addition, we have seen more than one word in the past two years is carbon neutrality. From a macro point of view, it includes four relatively clear clues - one is the reduction of production in high-carbon industries, such as steel and thermal coal; the other is the replacement of clean energy, such as new energy and new energy vehicles; the third is the future emission reduction technology, decarbonization technology and circular economy; and the fourth is the future carbon tax and carbon emission trading system. Theoretically, all four of these pieces will have a profound impact on upstream prices, and our current reaction to the entire price is only the first two processes.

This is our conclusion about the supply side, in the short term it will enter the upper moderation range; in the medium and long term, the elasticity and the hub will rise.

Then let's look at the demand side. Looking at China's economic trend from the demand side, even without this round of supply shocks, the clues of economic slowdown in the third quarter of this year will be formed, and one of the marginal changes is real estate. Before August, the real estate transactions in China's 30 cities were almost stable at an average of 550,000 to 600,000 square meters per day, suddenly dropped to 420,000 square meters in August, still about 420,000 square meters in September, and from 8 to 18 in October, we calculated that the daily average was almost 41 to 420,000 square meters, and real estate sales have gone down, which will have a more profound impact on the economy, including downstream durable consumer goods, upstream building materials, and other links to the economy through land transfer funds.

Exports are still at a high level, and external demand is still relatively prosperous. How to judge the future export trend? One of my personal judgments about export is that "empirical regularity is heavier than logic", from the perspective of the empirical trend of exports, it basically lasts in the PPI cycle, not only contains the price of exports, PMI export orders also generally continue in the price cycle, which proves that one of the factors affecting exports is the fluctuation of the inventory cycle of overseas manufacturing. If you look at it from this law, there is no problem with exports in the second half of this year, and there should still be an increase in pressure next year.

Therefore, from the demand side of this short cycle of the economy, we expect to experience two phases of slowdown. Among them, the first phase is the second half of this year, the main driver is the real estate sales center down the steps, and the second phase in the first half of next year, the main driver is the slowdown in exports. So I tend to think that looking at the next three or four quarters, the trend of gradual slowdown of the whole economy is relatively certain. This process will gradually pass to the policy formation.

There are two variables that are difficult for us to completely bypass, one is finance, and the other is employment. In each round, if economic pressure rises, fiscal and employment pressures will gradually form. The two stages just mentioned slowed down, like the pressure brought by real estate mainly through the land transfer fee to affect the finance, if the export in the future, will affect the employment link. From historical experience, the most relevant to employment is the export indicator. China's employment data in the second half of this year is better, mainly because the export boom is at a high level. If exports slow down next year, employment pressures are also a problem.

This involves future policies. From the general direction, I am inclined to the policy or will choose the time to further stabilize growth.

How to stabilize growth? Theoretically, there are three ways, monetary policy, fiscal policy, and industrial policy.

One of the traditional transmission variables of monetary policy is real estate. Historically, every interest rate cut and RRR cut will have an effect on the economy, and this mechanism of action is because the interest rate cut and the RRR reduction reduce the financing cost of enterprises, resulting in a higher investment tendency of enterprises? It seems that it is not, in many cycles, the cost of financing has come down, but manufacturing investment has not shown a counter-cyclical tendency. So how does the interest rate cut and RRR cut play a role? One of the important transmission mechanisms is that after each time this signal comes out, real estate sales will have a stability, and its downstream manufacturing and service industries will basically have a stability. This also corresponds to a very important inference, if this round of financial policy does not have much space, it itself corresponds to the traditional monetary policy will not have much flexibility. In the context of "housing and not speculation" and the prudent management system of real estate finance, I tend to think that this space may not be as large as in previous cycles.

Then, the main space for stable growth is in the "fiscal policy + industrial policy", specifically, at least the space can include the following aspects:

First, next year can be a more front-loading fiscal rhythm, the beginning of the fiscal force, the driving effect on the economy should still be more obvious.

Second, long-term rental investment is a policy direction. In a sense, we don't need to drive real estate, we can drive the construction industry.

Third, double carbon investment, the policy is currently formulating a "1 + N" policy system, if introduced, the future of double carbon investment is a direction during the 14th Five-Year Plan period.

Fourth, the field of consumption. From the historical experience, durable consumer goods will have a relatively large space, such as new energy vehicles in the future if there is a rural consumption policy driven, its driving effect should still be there.