Li Zhan, Chief Economist of China Merchants Fund Research Department
The following views are compiled from Li Zhan's speech at the China Macroeconomic Forum (CMF) Macroeconomic Monthly Data Analysis Conference (October 2021) (Issue 50).
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Stagflation in the fourth quarter was very pronounced, and stagflation will continue from the end of 2021 to the first quarter of 2022. It is embodied in two aspects, one is the supply side and the other is the demand side. As far as the supply side is concerned, the tightening of dual control and the limited supply of high-energy raw material industries will promote PPI to a historical high. The PPI price for September 2021 was 10.7, while the value of the means of production rose by 1.4 month-on-month. Supply constraints in energy-intensive industries have driven up raw material prices, the most important of which are the coal processing industry and the extractive industry, which have pushed 0.5 percentage points. The PPI high for the year will be in October and will remain high throughout the fourth quarter. Affected by the "pig cycle", the CPI is relatively weak, the demand is relatively sluggish, and the upstream and midstream prices cannot be transmitted downstream.
In addition, we still need to continue to pay attention to the following three aspects: First, international commodity prices. This determines whether stagflation is a short-term or medium-term factor, or even a long-term factor. Looking at the trend of commodities in the last five decades, global commodities maintained a decade-low level before last year. The gap between supply and demand caused by the epidemic factor, coupled with the release of water by the global central bank, has led to a rise in commodities this year. As for whether the cold winter will cause further increases in commodity prices, and whether this rise will be maintained for a long time, it still needs to be tracked continuously. The second is real estate risk. First of all, the amount of real estate bonds in the recent Chinese dollar bonds accounts for 1/4, about 1.3-1.5 trillion yuan. After Fantasia defaulted, the capital market made a lot of noise about Hong Kong's real estate debt, which will affect high-leverage private housing enterprises and increase the difficulty of renewing contracts in the fourth quarter or when they mature. If you can't borrow new to pay off the old, it will affect domestic bonds and other domestic wealth management products and lead to cross-default. The expansion of the scope of default by private enterprises in real estate will cause further contraction in the scale of the domestic real estate market. This is an important key point. Secondly, the income from real estate land sales and the land auction of local governments have expanded from the previous normal 5%-10% to nearly 30%. Real estate and infrastructure are twin engines. If you want to control the real estate bubble and strictly limit financing, it seems that it will not have much impact in the short term, but it is afraid of affecting another bigger bubble, that is, local government debt. Last year, there were 8 trillion yuan in land transfer funds, and the land fiscal revenue of local governments at all levels accounted for as much as 30%, and some places accounted for nearly 50%. If land revenue falls sharply, it will inevitably affect the continuation of local government debt. Although the amount of special bonds should be released, the issuance of special bonds this year is not active, and 50% of them flow to infrastructure. In the past, most of the real estate debt and land transfer funds went to infrastructure, such as industrial parks, which would limit another engine, that is, infrastructure. If the control of real estate is strengthened, it may cause a large-scale default of private real estate enterprises, which in turn will affect the income from real estate sales and land sales, which will bring a series of chain reactions. Problems arising from real estate are passed on to local government debt, infrastructure and urban investment debt. The third is the adjustment of the mesoscopic industrial policy. A balance has been formed between the medium- and long-term dual-carbon policy and short-term economic pressures. How to balance long-term economic structural reforms and short-term economic downturns? Focusing on long-term economic structural reforms, for the sake of longer-term benign development, allow the short-term economy to have a decline of one or two points. Based on 2019, GDP growth could fall to 4.5%-5% next year. If it really drops to 4.5%, there will be relevant signs in the fourth quarter of this year. At this time, we must continue to pay attention to the turning point of the policy.
On the whole, the policy turn point should pay attention to two aspects. First, the financial pressure of local governments. Local finances maintain local government expenditure on people's livelihood. The second is employment. According to the newly released employment rate and unemployment situation, it can be seen that the current employment is more optimistic, but whether this optimism is affected by the unemployment transmission time lag and other factors is still debatable. From a regulatory point of view, this is a choice and trade-off between the two paths. First, this supply-side structural reform continues the previous round of supply-side structural reform. The last round of reforms was mainly reflected in the control of financial leverage. During this period, great results have been achieved in the control of wealth management, off-balance sheet shadow banking and the implementation of the new asset management regulations. In addition, this continuation is also reflected in the control of real estate and local government debt. For example, in 2017, finance and real estate were regulated, so that funds were diverted to the real manufacturing industry. When the economy rises, there will be a gradient in the reform of local government debt, making the entire economy less stressed. If this real estate regulation has a chain reaction, affecting local government debt, it will lead to an increase in the pressure on the overall real economy. On the whole, China's current reform should be light and simple in the long run. At present, China's economy has to carry the burden forward, and it is difficult to complete its contribution in the short term, waiting for economic growth and prosperity before unloading the burden, and achieving light loading and simple operation in the long run. Reduce leverage in stages, remove baggage, and transition from weight forward to light loading.