Opinion Leaders 丨China Finance Forty Forum
This article is written by Zhu He, CF40 Research Department
On August 16, the National Bureau of Statistics released the main economic data from January to July, and the year-on-year growth rate of production, consumption, investment and other indicators slowed down, which was less than market expectations.
Zhu He, a young researcher at the China Finance Forty Forum (CF40), believes that the biggest logic of the macro economy is that the current economic recovery has basically entered the second half of the process, and at the same time, the gradual withdrawal of the previous ultra-conventional stimulus policy is superimposed.
Zhu He said that more and more reasons to support macro policies should begin to exert force, and now is the best time for macro policies to exert force:
On the one hand, the short-term impact of the epidemic has basically passed, and the socio-economic order has basically returned to normal. Normal macroeconomics are inherently cyclical, so normal macro policies are needed to iron out this cyclicality. "When the macro-economy under normal conditions shows a weakening trend, macro policies should be gradually exerted, which is the proper meaning of macro policy normalization."
On the other hand, more and more evidence shows that the current macro boom has weakened, and the probability of misjudging the situation has been low, and the time left for macro policies to advance is decreasing.
Zhu He said that next, fiscal and monetary policies should work together. Fiscal policy should improve policy efficiency; monetary policy has better flexibility and more policy space, which can play a leading role.
The biggest feature of July's macro data is the overall weakening.
From a year-on-year perspective, whether it is PMI, industrial added value, or indicators representing domestic demand such as consumer investment, or monetary indicators such as M1, M2, and social finance, there has been a significant decline compared with June.
From the perspective of average growth rates for two consecutive years, these indicators are also performing worse than in June. Although the price level is relatively stable, the situation in terms of employment is that the pressure on the current job market is still large, basically the same as in 2019.
The biggest logic of the macro economy is that the current economic recovery has basically entered the second half of the process, and at the same time, the gradual withdrawal of the previous super-conventional stimulus policy is superimposed. These policies include the weakening of the marginal effect of stimulus policies in overseas developed countries, as well as the gradual normalization of domestic monetary and fiscal policies.
Specifically, the industrial added value and PMI at the production end are continuing to decline, especially the PMI has fallen for 4 consecutive months, forming a downward trend. This is related to the disturbance of supply factors, such as weather conditions, production restrictions, chip supply shortages and local outbreaks, but the impact of these factors is debatable. At the same time, the impact from the demand side is also important.
From a demand perspective, the biggest problem is no longer the relatively slow recovery of consumption, but the comprehensive and continuous decline in real estate and infrastructure investment, only manufacturing investment is still slowly recovering.
In July, the year-on-year growth rates of real estate investment and infrastructure investment were 1.4% and -10.1%, respectively, down sharply from June. Of course, such a large decline is related to accidental factors, such as heavy rainfall and local epidemics will affect the start of the project, but this downward trend has been basically established.
The reason why manufacturing investment can show a relatively sustained recovery is inseparable from the export boom brought about by overseas demand. At present, we have not been able to observe any significant deterioration in overseas demand.
The market has basically formed a consensus on the decline in real estate investment, the main reasons include tightening the financing environment and tightening regulatory policies.
The impact of the policy is gradually reflected in the indicators of real estate. For example, there has been a significant decrease in the portion of real estate financing that comes from the resident sector, indicating that banks are beginning to tighten their home loans to the resident sector. This is directly related to the credit data in July, when new medium- and long-term loans in the residential sector were only 397.4 billion yuan, the lowest value in the same period in the past five years. The decline in investment also corroborates with the decline in new real estate starts and sales area.
Relative to real estate investment, the market has a certain divergence on infrastructure investment. There is a view that the fiscal back-up effect in the second half of 2021 will form a certain support for infrastructure investment.
The so-called fiscal back-end is actually based on the observation that the fiscal expenditure in the first half of 2021 showed the characteristics of "over-revenue and expenditure savings", that is, the speed of fiscal expenditure in the first half of 2021 was slower than that of the same period in previous years, according to which it was inferred that the speed of fiscal expenditure in the second half of 2021 would accelerate.
Logically, this observation is fine, but it is important to note the basic fact that the year-on-year growth rate of fiscal budget expenditure in 2021 is only 1.8%. Under such a growth constraint, even if there is a certain growth rate of fiscal expenditure in the second half of the year, it may not have a substantial impact on total demand in terms of magnitude.
Focusing on infrastructure investment, the impact of fiscal expenditure on infrastructure will be smaller. In the past three years, the proportion of infrastructure investment in the budget has continued to decline, and the overall growth rate is negative, basically the support for infrastructure investment in the budget is not large.
In such a macro environment, the overall credit expansion rate is significantly declining. The social finance data in July was significantly lower than market expectations, of which the loan data performed poorly, and the contraction of the scale of government bond issuance and the reduction of off-balance sheet financing were the main reasons. This also reflects the impact of macro policy normalization.
From the perspective of historical experience, the decline in credit growth rate has a relatively strong inertia, which tends to last for 4-6 quarters. Of course, there will be a phased recovery in this process. Even if macro policies begin to shift, especially monetary policy begins to gradually ease, there is still a time lag in the final transmission of this policy impact to the credit side.
Therefore, it is expected that in the next two quarters, it is difficult to substantially change the general direction of credit decline, but the growth rate decline in August may not be as fast as in July.
There are more and more reasons to support macro policy should start to exert force, and now is the best time for macro policy to exert force.
On the one hand, the short-term impact of the epidemic has basically passed, and the socio-economic order has basically returned to normal. Even if there is an occasional local epidemic, with effective prevention and control measures, the impact of the epidemic on the entire macro economy is not large. The normal macro economy is inherently cyclical, so normal macro policies are needed to iron out this cyclicality. When the macro economy under normal conditions begins to weaken, macro policies should gradually exert force, which is the proper meaning of macro policy normalization.
On the other hand, the probability of misjudgment of the situation is already very low, and the time left for macro policies to advance is decreasing.
There is growing evidence that the current macro boom is weakening, and the probability of misjudgment at this time, that is, the probability that the economy will overheat in the next round, is actually quite low.
It needs to be explained here that the rise of commodities is not equal to inflation, and in the case of weak aggregate demand, it is difficult for PPI to transmit to CPI, and the future probability is that PPI will converge rapidly to CPI. ➡️ Does China need to worry about imported inflation?
The central government has proposed to grasp the "timeliness and effectiveness" of macro policies, which is the most important variable to consider. As the economic recovery momentum weakens and the downward pressure increases, the earlier the macro policy intervention, the smaller the macro policy intensity required, and the greater the marginal effect it can achieve at this stage.
If we wait until the economy confirms the downward trend and then adjust macro policies, at this time the inertia of the economy has been formed, the required policy strength will be greater, and the uncertainty of the final effect will be higher.
Next, fiscal and monetary policies should work together, fiscal policy should improve policy efficiency, and monetary policy can play a leading role.
Because of budgetary constraints, budgetary expenditures can only be "step-by-step". Even taking into account the backwardness of fiscal expenditures, as mentioned earlier, this part of the increase will not have a great effect on stabilizing macro aggregate demand. Special debt may be a possible direction of force, but simply emphasizing the improvement of the efficiency of the use of special debt may not be ideal, and the urgent problem that needs to be solved is to relax many restrictions on special debt. At the same time, considering the background of preventing and resolving local hidden debt risks, the motivation and ability of local governments to promote construction projects on a large scale are obviously limited.
In contrast, monetary policy has better flexibility and more policy space.
On the one hand, monetary policy can achieve real fine-tuning, especially on the basis of full communication with the market, and sometimes it may not need to do too much policy operation to achieve the desired purpose.
At the same time, monetary policy actually has enough policy space. If the 7-day reverse repo rate is used as an indicator of the short-term benchmark interest rate, the current 2.2% is significantly higher than the short-term policy rate in developed countries.
At this stage, it may be better to use monetary policy to respond to macroeconomic changes in advance, because China's economic growth rate is still at the leading level in the world. Even if the interest rate differential between China and developed countries narrows, as long as the RMB exchange rate is ensured to be flexible enough, the exchange rate can absorb the impact of this narrowing interest rate differential in a more timely manner at this stage.
However, if we wait until the economies of developed countries begin to fully recover and the loose monetary policy is officially withdrawn, we may be more passive when we choose the opportunity to use monetary policy. Because in the stage of monetary policy adjustment in developed countries, global capital will be more sensitive to interest rate changes, which may bring greater pressure on capital flows, and it will be more difficult for China to use monetary policy.
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CF40 Macro Doctor July 2021 Report Sheet
Text | ZHANG Bin, senior researcher of CF40, and Jiajia Zhang, young researcher of CF40
Macroeconomic operations
◆ The degree of economic prosperity has dropped significantly. The official manufacturing PMI was 50.4 in July, down 0.5 percentage points from June. The manufacturing PMI for large enterprises was 51.7, unchanged from the previous month; the manufacturing PMI for medium-sized and small businesses was 50.0 and 47.8, down 0.8 and 1.3 percentage points respectively from June.
◆ The growth rate of industrial production has slowed down. In July, the added value of industries above designated size in the country increased by 6.4% year-on-year and 0.3% month-on-month; the average growth rate in two years was 5.6%, down 0.9 percentage points from June. In terms of major categories, the manufacturing industry increased by 6.2% year-on-year, an average growth of 6.1% in two years; the added value of the mining industry increased by 0.6% year-on-year, an average decline of 1.0% in two years; and the electricity, heat, gas and water production and supply industry increased by 13.2% year-on-year and an average growth of 7.3% in two years. The added value of high-tech manufacturing increased by 15.6% year-on-year, with an average growth of 12.7% in two years.
◆ Imports and exports fell, and the trade surplus expanded. The value of DOLLAR-denominated exports rose 19.3% year-on-year in July, an average increase of 12.9% in two years, down 2.2 percentage points from June. The value of imports increased by 28.1% year-on-year, an average growth of 12.8% in two years, down 6.0 percentage points from June. The trade surplus in July was $56.59 billion, up $5.06 billion from the previous month. In terms of countries and regions, the average growth rate of exports to the EU, Japan, South Korea and ASEAN in two years was 6.4%, 5.1%, 13.8% and 14.3%, down 3.5, 1.1, 0.7 and 2.1 percentage points from June, respectively; the average growth rate of exports to the United States in two years was 13.4%, up 3.7 percentage points from June.
◆ Consumption declines. In July, the total retail sales of consumer goods increased by 8.5% year-on-year, down 0.1% month-on-month, and increased by an average of 3.6% in two years, down 1.3 percentage points from June. Auto sales fell 1.8% year-on-year and increased by an average of 5.0% in two years. From January to July, the national online retail sales increased by 21.9% year-on-year. Among them, the online retail sales of physical goods increased by 17.6% year-on-year, accounting for 23.6% of the total retail sales of consumer goods.
◆ The investment in fixed assets is generally stable, and the growth rate of manufacturing investment is accelerating. From January to July, the cumulative growth rate of fixed asset investment in the country was 10.3% year-on-year, an average growth rate of 4.3% in two years, down 0.1 percentage points from January to June; and 0.2% month-on-month in July. The cumulative growth rate of private fixed asset investment was 13.4% year-on-year, and the average growth rate of two years was 3.4%. Among them, the cumulative growth rate of manufacturing investment in manufacturing industry increased by 17.3% year-on-year, an average growth rate of 3.1% in two years, an acceleration of 1.1 percentage points over January-June; the cumulative growth rate of infrastructure investment in the tertiary industry was 4.6% year-on-year, an average growth rate of 1.8% in two years, down 0.7 percentage points from January to June; real estate development investment increased by 12.7% year-on-year, an average growth rate of 8.0% in two years, down 0.2 percentage points from January to June. From January to July, the cumulative sales area of commercial housing increased by 21.5% year-on-year, an average growth rate of 7.0% in two years; the cumulative area of newly started construction fell by 0.9% year-on-year, and an average decline of 2.7% in two years.
◆ The core CPI has rebounded, and the PPI is still at a high level. The CPI in July increased by 1.0% year-on-year and fell by 0.1 percentage points from June. Among them, non-food prices increased by 2.1% year-on-year, up 0.4 percentage points from June; food prices fell by 3.7% year-on-year, down 2.0 percentage points more than june. Core CPI, excluding food and energy, grew 1.3% year-on-year, up 0.4 percentage points from June. Affected by the rise in upstream raw material prices, the PPI rose rapidly. PPI grew by 9.0% year-on-year in July, up 0.2 percentage points from June.
Macroeconomic operating environment
◆ The external economic boom has declined. JPMorgan's global consolidated PMI was 55.7 in July, down 0.9 percentage points from June, and JPMorgan's global manufacturing PMI was 55.4, down 0.1 percentage points from June. The U.S. manufacturing PMI fell back to 59.5 from 60.6 June, the euro area manufacturing PMI fell to 62.8 from 63.4 June, and the Japanese manufacturing PMI rebounded to 53.0 from 52.4 June. CRB spot prices increased 0.6% q-o-q.
◆ The growth rate of social financing stock has declined. M1 grew at 4.9% year-on-year in July, down 0.6 percentage points from June, and M2 grew at 8.3% year-on-year, down 0.3 percentage points from June. The stock of social financing scale increased by 10.7% year-on-year, down 0.3 percentage points from June. In July, the new social financing was 1.1 trillion yuan, down 2.6 trillion yuan from June. Among them, the government's new debt (national debt + local debt + special debt) was 0.2 trillion yuan, down 0.6 trillion yuan from June; the new debt of enterprises was 0.5 trillion yuan (including the new debt of local financing platform enterprises), which was 1.6 trillion yuan less than in June; and the new debt of residents was 0.4 trillion yuan, down 0.5 trillion yuan from June.
◆ 7-day repo rate fell. The 7-day interbank repo rate averaged 2.25% in July, down 18 basis points from June. The short-term liquidity spread represented by the difference between the 3-month SHIBOR and the 3-month Treasury yield rebounded by 6 basis points from June to 0.60%,00% the difference between the 10-year yield and the 1-year Yield rose 5 basis points from June to 0.69%, and the difference between the 10-year AA yield and the 10-year Treasury yield represented a credit spread of 1.69% unchanged from the previous month.
Near-term outlook and risk warnings
◆ The momentum of economic recovery has weakened. Affected by the spread of the epidemic, floods and the high price of raw materials, there was a clear downward pressure on the economic data in July. Consumption has still not been able to get rid of the negative impact of the epidemic, the growth rate of infrastructure and fixed asset investment is at a low level, and export performance is still good, but it is difficult to have room for further improvement. The continuous decline in social finance and M2 means that the margin of demand in the future is weakening.
◆ CPI and core CPI are at a low level, and consumer terminal demand is still weak. Under the role of the base period, the price growth rate of the future has rebounded year-on-year, and the inflation pressure throughout the year is limited.
◆ The main risks to the domestic economy in the future are the re-impact of the epidemic; the excessive decline in the growth rate of generalized credit, infrastructure investment and the real estate market; and the concentrated exposure of risks in the financial sector.
Diagnostic recommendations
◆ Actively use monetary policy tools to reduce the level of interest rates and maintain a reasonable growth in aggregate demand. In terms of the policy tool mix of aggregate demand management, the reasonable cooperation is the active use of monetary policy tools in the near future, and more reliance on fiscal policy tools after the Fed's interest rate hike expectations are strengthened next year.
◆ Although the formulation and improvement of relief policies for the epidemic and disaster situation, the central government bears the corresponding expenditure.
Macroeconomic operation test report sheet
Macroeconomic Environment Test Report Sheet