On October 18, the third quarter economic data was released. According to the National Bureau of Statistics, GDP (gross domestic product) in the third quarter increased by 4.9% year-on-year, and the average growth rate in two years was 4.9%, falling below 5%. In the first three quarters, the GDP was about 82.31 trillion yuan, an increase of 9.8% year-on-year, and an average growth of 5.2% in two years (down 0.1 percentage points from the first half of the year). In terms of quarters, the economy in the first and second quarters increased by 18.3% and 7.9% year-on-year, and the average growth rate in the two years was 5.0% and 5.5%, respectively.
What do you think of the third quarter economic data? What are the problems in the current economic recovery? How should policies respond?
The CF40 macro policy report "Economic Policy After Per Capita Income of $10,000" in the third quarter of 2021 pointed out that overall, the recovery momentum of China's economy in the third quarter has weakened, and the economy has begun to face downward pressure. There are three main problems in the current economic recovery: one is the weak recovery of consumption; the second is the decline in investment, especially real estate and infrastructure; and the third is that the employment gap has not yet fully converged. The current high export growth rate should not be too optimistic, the export boom mainly comes from the price increase brought about by the rising cost, rather than the continuous strengthening of actual foreign demand, and it is expected that the subsequent manufacturing profit improvement will weaken.
The "Report" pointed out that the current Chinese economy has not fully recovered to its pre-epidemic state, and the downward pressure on the economy has begun to increase. The focus of the current macro policy is to enhance aggregate demand, achieve a stable macroeconomic connection between this year and next year, and avoid large fluctuations in the economy.
The first is to avoid liquidity crises in real estate enterprises and ensure the cash flow of enterprises. The second is to boost the growth rate of social financing in the whole society and enrich the cash flow of other industries and departments. The third is to improve the supply elasticity of upstream industries and related products, use market-oriented means to alleviate the upward pressure on commodity prices, and relax import restrictions on some upstream products.
The following is the macro section of the third quarter macro policy report "Economic Policy after Per Capita Income of $10,000" (with abridgement), the authors are Zhang Bin, senior researcher of China Finance Forty Forum (CF40), Zhu He, deputy director of CF40 Research Department and young researcher, and Zhang Jiajia and Zhong Yi, CF40 young researchers.
External environment: The misalignment of supply and demand restricts the global economic recovery
The global economic boom has retreated from its high level. In the third quarter of 2021, J.P. Morgan's Global Consolidated PMI and Global Manufacturing PMI fell from the Q2 average of 57.3 and 55.8 to the Q3 average of 53.8 and 54.5. By country, in addition to Brazil and India continuing to rise, major economies such as the United States, Japan, the euro area and Russia fell back to the high average manufacturing PMI in the third quarter.
The misalignment of supply and demand constrains the global economic recovery. In its latest Global Economic Prospects report, the International Monetary Fund (IMF) slightly lowered its global economic growth forecast this year by 0.1 percentage points to 5.9 percent, and lowered its U.S. economic growth forecast to 6 percent from 7 percent previously. Rising energy prices and tight supply chains are prominent manifestations of the mismatch between supply and demand in the current economic recovery process, posing a threat to economic recovery. With insufficient shipping workers and truck drivers employed, the two major ports in the western United States, the Port of Los Angeles and the Port of Long Beach, have recently faced an unprecedented backlog, with shortages in some commodity supplies. In areas where access to vaccines is difficult, economic recovery remains markedly constrained by the outbreak.
Figure 1 JPMorgan Global Manufacturing PMI
Source: Wind, China Finance Forum of Forty (hereinafter the same)
Figure 2 Manufacturing PMI of major economies around the world
Commodity prices continue to rise, and global energy shortages spread. Driven by the recovery in demand and the shortage of energy supply, crude oil prices have continued to rise this year. As of October 15, 2021, Brent crude oil was at spot prices of $85.2/barrel and futures at $84.9/barrel, up 68% and 64%, respectively, from the end of last year. The International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and the Organization of the Petroleum Exporting Countries (OPEC+), the three major energy forecasters, believe that the sharpest oil inventory consumption has passed, and this year's oil supply gap will turn into a surplus next year. OPEC+ said it would increase production by 400,000 bpd per month as originally planned in November, that is, it would not increase production in excess to alleviate the supply shortage. Since September, natural gas, thermal coal and electricity prices in Europe and the United States have reached new record highs, and energy shortages have intensified and begun to spread to the world. As of October 15, 2021, IPE natural gas and thermal coal rose to 234 pence/sem and $250/mt, respectively. Electricity prices in many countries in the United States and Europe have risen sharply, and they have refreshed their historical records. Shortages of natural gas, LNG and coal have further boosted alternative demand for oil to keep residents lighting and production running.
U.S. inflation continues to rise, and expectations of the Fed's easing are ahead of schedule. Since the beginning of 2021, the US CPI has risen rapidly. In September, the U.S. CPI increased by 5.4% year-on-year, and the core CPI rose 4.0% year-on-year. Meanwhile, the U.S. unemployment rate has fallen from a high of 14.8 percent since the pandemic to 4.8 percent in September. Recently, the IMF warned that the global economy is entering a phase of inflation risk and called on central banks to be "very, very vigilant" and to take early steps to tighten monetary policy as soon as price pressures persist. The IMF warns of upside risks to inflation in the United States, the United Kingdom and other advanced economies. The IMF specifically named the Fed, saying central banks such as the Fed should be prepared to tighten policy to prevent inflation from spiralling out of control.
The minutes of the September Federal Open Market Committee (FOMC) monetary policy meeting showed that most Fed officials said at the meeting that the main risks to inflation are still trending upwards as supply chain disruptions and labor shortages persist for longer, as well as the impact on prices and wages, are more severe than previously expected. Participants argued that rising inflation and strong demand indicate that the Fed is close to achieving its economic goals and could soon begin monetary policy normalization by reducing the pace of monthly asset purchases. This reinforces market expectations that the Fed will announce a "gradual bond reduction" in November. Fed officials remain divided on the issue of rate hikes. Federal funds rate futures data show that the market's expectations for the Fed's interest rate hike next year are heating up, and the current market expects the probability of the Fed to raise interest rates in September next year is as high as 90%.
Figure 3 Inflation in the United States continues to rise
Figure 4 International energy prices climb
Internal environment: Fiscal expenditure and social credit continue to decline
Broad fiscal expenditure continued to decline. China's fiscal expenditure budget growth rate in 2021 is the lowest in the past three decades, only 1.8%. Adding up government fund expenditure and general fiscal expenditure as a measure of broad fiscal expenditure, the growth rate of China's general fiscal expenditure budget in 2021 also hit a new low since the release of public data, only 4.9%. From January to August 2021, government public finance expenditure increased by 3.6% year-on-year, government fund expenditure increased by -7.3% year-on-year, and generalized fiscal expenditure increased by 0.4% year-on-year, down 0.7 percentage points from the end of the second quarter. In contrast, the growth rate of broad fiscal revenue from January to August was 17.3%.
The growth rate of social financing stock continued to decline. At the end of the third quarter, the growth rate of social financing scale stock fell by 1.0 percentage points from the end of the second quarter to 10.0%, the year-on-year growth rate of M1 fell by 1.8 percentage points to 3.7% compared with the end of the second quarter, and the year-on-year growth rate of M2 fell by 0.3 percentage points from the end of the second quarter to 8.3%. The scale of new social financing in the third quarter was 6.9 trillion yuan, down 1.8 trillion yuan from the same period last year. By sector, the new debt of government departments was 2.0 trillion yuan, down 1.0 trillion yuan from the same period last year; the new credit of the enterprise sector was 3.2 trillion yuan, down 0.1 trillion yuan from the same period last year; and the new credit of the residential sector was 1.8 trillion yuan, a decrease of 0.8 trillion yuan from the same period last year.
Interest rates in financial markets are generally stable, and corporate credit risk premiums are rising. In September 2021, short-end rates were 2.18% average and R007 were 2.37%, both down 6 basis points from June. After the outbreak of the Evergrande incident, the risk of corporate credit debt has increased significantly. The credit spread between the yield on 3-year low-credit rating (AA-) corporate bonds and the yield on treasury bonds rose from 3.32% in early August to 3.73% in mid-October. For the recent debt crisis of Evergrande Group, which has been highly concerned by domestic and foreign investors, the central bank said that the problem of Evergrande Group in the real estate industry is a phenomenon of Evergrande Group's total liabilities, financial liabilities are less than one-third, creditors are relatively scattered, and the risk exposure of individual financial institutions is not large.
Figure 5 Government fiscal expenditure and revenue in a broad sense
Figure 6 The stock of social financing scale increased year-on-year
Figure 7 DR007
Figure 8 Credit spreads on low-rated corporate bonds
The RMB exchange rate fluctuates in both directions. Since the second half of 2020, the RMB exchange rate has maintained a bilateral oscillating trend. In the third quarter, the overall volatility of the RMB/USD exchange rate decreased, oscillating in a narrow range in the range of 6.44-6.50. The Renminbi Basket Exchange Rate Index (CFETS) recovered from 98.0 at the end of Q2 to 99.6 at the end of Q3. U.S. inflation continued to rise, and the Federal Reserve was about to exit accommodative monetary policy, pushing the dollar index higher. The strong dollar has not put too much pressure on the renminbi, which is related to China's economic fundamentals and market sentiment. China's assets are still more attractive to overseas investors, China's trade surplus continues to expand under the better import and export situation, and the expectations and sentiment of market investors are more rational, which provides a certain support force for the RMB exchange rate.
Figure 9 Onshore and offshore exchange rates
Figure 10 Rmb basket exchange rate
Operating characteristics: weak endogenous growth momentum
GDP in the first three quarters of 2021 increased by 9.8% year-on-year, with an average growth of 5.2% in two years. In terms of quarters, the year-on-year GDP growth rate in the first quarter was 18.3%, with an average growth rate of 5.0% in two years; the year-on-year GDP growth rate in the second quarter was 7.9%, and the average growth rate in the two years was 5.5%; the year-on-year GDP growth rate in the third quarter was 4.9%, and the average growth rate in the two years was 4.9%.
Overall, the recovery momentum of China's economy weakened in the third quarter, and the economy began to face downward pressure. There are three main problems in the current economic recovery: first, the recovery of consumption is weak; third, the pressure on investment has increased, especially in real estate and infrastructure; third, the employment gap has not yet completely converged. The current high export growth rate should not be too optimistic, the rise in exports is mainly due to the price increase brought about by the rising cost, and the improvement of manufacturing profits is weakening.
1． Consumption recovered less than expected
Since the beginning of the epidemic, the recovery of consumption has been slower than the progress of economic recovery. Since the beginning of 2021, the progress of consumption recovery has been significantly lower than expected, and the recovery of some service consumption has been almost at a standstill. In September, the year-on-year growth rate (two-year geometric average) of the total retail sales of goods in the total social retail sales was 4.3%, lower than the level of 8%-9% before the epidemic. In August, the year-on-year growth rate of catering revenue (two-year geometric average) fell into negative growth, at -5.8%; the year-on-year growth rate in September was 0.1%, still significantly lower than the pre-epidemic level of 9%-10%.
Passenger car consumption directly reflects the consumer demand for durable goods of residents, and is an important indicator for judging consumer demand in the macro analysis of various countries. Passenger car sales in September were 1.58 million units, down 17.3% year-on-year, with a two-year average growth rate of -5.7%, and the absolute value is even lower than the same period in 2019. The market generally attributed the decline in car sales to a reduction in production caused by a shortage of chips. This is obviously an important reason, but changes in terminal demand are also masked by supply shocks. According to our calculations, if there is no impact of chip shortage on the supply side, passenger car sales in the third quarter will grow by 3.9% year-on-year, down 3.7 percentage points from the second quarter. After excluding the interference of supply factors, the recovery cycle of passenger car sales in this round has begun to weaken. In the next six months, even if the chip shortage problem can be substantially alleviated, under the intertwining of supply and downward demand, passenger car sales in the fourth quarter will still be difficult to return to the same period in 2020.
Figure 11 Total retail sales of consumer goods: year-on-year
Figure 12 Passenger car sales for the month-on-year increase
Note: The year-on-year data of social zero and passenger car sales after 2021 has been treated geometrically for two years.
2. Investment has fallen, especially in real estate and infrastructure
In the third quarter of 2021, fixed asset investment declined. From January to September, the cumulative growth rate of fixed asset investment in the country was 7.3% year-on-year, an average growth rate of 3.8% in two years, down 0.5 percentage points from January to June. From June to September, the average growth rate of fixed asset investment in the two years was -3.2%, -7.4% and -8.3%, respectively, and the decline was constantly expanding. Among them, the year-on-year growth rate of the three major investments continued to diverge, manufacturing investment continued to pick up, infrastructure investment was weak, and real estate investment fell steadily. Among them, the average growth rate of manufacturing investment in September was 6.4% in two years, up 0.5 percentage points from June. However, in the context of rising raw material prices and the impact on the profits of middle and downstream enterprises, the follow-up trend of manufacturing investment remains to be seen; the average growth of infrastructure investment in two years is zero, down 3.9 percentage points from June; the average growth rate of real estate development investment in two years is 4.0%, down 3.2 percentage points from June.
Infrastructure investment in the second half of the year is still difficult to improve. Local platform companies affiliated with local governments are the leading force in the current infrastructure construction, and it is difficult to really support infrastructure investment in the second half of the year. The goal of fiscal policy to "maintain growth" may have given way to "risk prevention" in stages. On the one hand, the proportion of infrastructure expenditure in the fiscal budget has decreased significantly. On the other hand, the pressure of fiscal revenue reduction is further intertwined with the risk of local debt, which directly slows down the new issuance of explicit local bonds and increases the urgency of the resolution of hidden bonds, and the willingness of local platforms to continue to expand infrastructure is weakened. The fiscal "back-post" effect will not have a significant boost to infrastructure construction, and the "over-revenue and expenditure saving" in the first half of the year will not form a space for spending in the second half of the year to significantly exceed the budget.
The real estate market may accelerate its decline. In the third quarter, real estate data fell across the board. Indicators such as real estate investment, new construction and sales are likely to show negative growth in 2022. From the perspective of housing demand, the new regulations on housing-related loans introduced at the end of 2020 limit the amount of housing loans issued by some banks to the resident department, and the willingness and pace of residents to buy houses are also more stable. Under the new regulatory rules, the personal housing loans that some banks can issue have been incrementally restricted, and the difficulty of residents obtaining home loans has increased accordingly, and the interest rate of loans has also risen. From June to August 2021, the cumulative decrease of new medium- and long-term loans for residents was 450 billion yuan less than that of the same period last year. The average interest rate on loans for the first and second homes nationwide in September 2021 rose by 23 basis points and 29 basis points respectively from the end of last year. "Evergrande incident" makes some buyers worried about the price reduction of houses and the difficulty of developers to pay houses on schedule, but also affects the demand for housing, from the perspective of housing supply, real estate companies still need a period of time to fully adjust the previously unsustainable business model, in the short term, it may not be able to fully meet the regulatory requirements of the "three red lines", financing capabilities, construction and willingness to buy land will be subject to a certain contract. Under the "three red lines" standard, many housing enterprises have not yet met the regulatory requirements of "asset-liability ratio after excluding pre-collection", because this requires housing enterprises to fundamentally adjust their business models, reduce leverage and dependence on capital operations, and shift to a more sustainable business model. In this case, the financing ability of real estate enterprises will be restricted by regulatory rules, and the willingness to start construction and purchase land will also be affected.
Figure 13 Year-on-year growth rate of fixed asset investment in the month
Figure 14 The growth rate of the three major investments in the same month
Note: The year-on-year data of fixed asset investment and the three major investments after 2021 have been treated geometrically for two years.
3． The current export boom is mainly due to rising costs, and the improvement of manufacturing profits has begun to weaken
Since the epidemic last year, exports have been an important force driving the sustained recovery of the economy, but the recent export boom has not continued to drive the improvement of manufacturing profits. Accurately distinguishing between the two effects of quantity and price in export expansion is crucial to judging the current export situation and the situation of export enterprises.
According to the detailed export data of products under the 8-digit code released by the General Administration of Customs, mainly including the export amount and export quantity of such varieties, and excluding a small number of products with missing data, we finally screened out 6512 categories of products and split their export growth rate. The idea of splitting is: the growth rate of export amount = a. export quantity growth rate + b. export unit price growth rate + c. export quantity growth rate * export unit price year-on-year growth rate. After calculation, it can be seen that since July 2021, the pulling effect of the number of export products on exports has suddenly and rapidly declined, and the price increase of export products is the most important factor driving the year-on-year growth rate of export amounts. More than 60% of the export growth in July and August 2021 came from price effects. Exports grew by 25 percent year-on-year in August, with 15 percentage points coming from simple price increases. As a typical example, the rise in steel export prices alone can explain 1 percentage point of the 25 percentage points of the year-on-year growth rate of national exports in August, and the explanation is 4%.
Changes on the supply side are the main reason for the strengthening of the price effect. As mentioned earlier, the quantitative effect of the explanatory power of export expansion has been very pronounced after June, and it is very different from the previous performance in the external demand expansion phase. This shows that the price increase at this stage does not come from the strengthening of terminal demand, but is more likely to be driven up by the rapid increase in production costs. This coincides with the rapid rise in upstream product prices and freight prices year-to-date, and also explains the fact that the current improvement in manufacturing profits has slowed down significantly. Since June 2021, the strength of profit improvement in the manufacturing industry has weakened significantly, and the profit growth rate of the manufacturing industry in the month of August was only 6% year-on-year.
China's current export boom mainly comes from the rise in the price of export products, rather than the continuous strengthening of actual foreign demand. Further, the main reason for the increase in the price of export products is the rapid rise in production costs and freight costs. Manufacturing profits have not improved due to the export boom, and the operating conditions of some downstream industries have continued to deteriorate due to rapid cost increases. In the future, with the ebbing tide of US financial subsidies and the gradual restoration of production order in developed countries, external demand may begin to weaken and drive the volume of exports to decline further. The export quantity is the order scale of the enterprise, which directly corresponds to the actual production status and capacity utilization rate of the enterprise, and is also the most direct factor affecting the investment decision of the export enterprise. Historical data show that the year-on-year growth rate of exports is roughly ahead of the growth rate of manufacturing investment by about a year, and the two maintain a relatively stable correspondence. At that time, China's manufacturing enterprises may face the dual pressure of cost and demand, and affect the profits and investment of the manufacturing industry. This will add new uncertainty to our economic recovery.
Figure 15 Export value and manufacturing profit
Figure 16 Breakdown of volume-price effect since July 2020
4． The CPI is low and the employment pressure is still there
The core CPI level, which better reflects changes in the level of aggregate demand, is low. In order to eliminate the base disturbance caused by the epidemic, we multiplied the chain data of the three types of price indicators and finally obtained the cumulative increase relative to December 2019. As the chart shows, the PPI has seen the highest increase of 8.5% over the past 19 months. Affected by the "double control" of environmental protection and energy, the prices of products in some high-energy-consuming industries such as coal, petrochemicals, and nonferrous metals have risen significantly, and the year-on-year growth rate of PPI has also reached a new high, with a year-on-year growth rate of 10.7% in September, a record high. Dragged down by pork prices, the cumulative increase in CPI was 0.8%. Excluding food and energy prices, core CPI tends to be a more realistic reflection of inflationary pressures, with core CPI rising 1.5% over the past 16 months and low inflation.
Corresponding to the low core CPI, the employment gap has not fully converged. Although the national survey unemployment rate in the third quarter and the unemployment rate surveyed in 31 major cities returned to the level of 2019. However, policies such as "double control" of energy consumption, "double reduction" of education and real estate regulation and control have widely affected the employment situation in the market, which is not reflected in the employment population of urban survey unemployment in a timely manner. As of 2020, the number of practitioners in China's education and training industry exceeded 10 million, and the total number of real estate intermediary brokers was close to 2 million, which had a significant impact on the job market due to the sudden coldness of the education and real estate industry. In September, the surveyed unemployment rate for the 16-24-year-old population was 14.6%, slightly lower than the same period in 2020 and significantly higher than the same period in 2018-2019, indicating that employment pressure on the youth population has not been substantially alleviated. As of the third quarter, the number of migrant workers employed was barely the same as in the third quarter of 2019, but the average growth rate of migrant workers' wage income in two years was 6.2%, lower than the growth level before the epidemic, and also lower than the two-year average growth rate of per capita disposable income in the second quarter of the country of 7.1%.
Figure 17 Cumulative increases by inflation measure relative to December 2019
Figure 18 Urban survey unemployment rate
Figure 19 Unemployment rate in the census for 16-24 years
Figure 20 Growth rate of average monthly income of migrant workers
Outlook and policies: ensure the cash flow of housing enterprises and boost the level of total demand
At present, China's economy has not fully recovered to its pre-epidemic state, and the downward pressure on the economy has begun to increase. Judging from the comprehensive performance of recent consumption, real estate, infrastructure, exports, CPI, employment and other data, the problem of insufficient demand in the real economy is prominent, the recovery of consumption is weak, the real estate market may accelerate its decline, the unstable factors of foreign trade exports will increase, and infrastructure investment is difficult to improve.
In the short term, we should focus on avoiding the liquidity crisis of real estate enterprises. The key to preventing a liquidity crisis is to ensure the cash flow of enterprises, the cash flow of real estate enterprises mainly comes from sales revenue, and the real estate mortgage policy has a significant impact on real estate sales revenue. First, it is necessary to relax the limit on the amount of housing mortgage policy in a timely manner, adhere to the principle of "implementing policies according to the city", and meet the housing mortgage needs of residents more according to commercial principles, so that real estate can restore its self-hematopoietic function. The second is to support the borrowing of new debts of real estate enterprises to repay the old. The third is the emergency rescue loan for real estate companies that have been doing well in the past but have suddenly fallen into liquidity difficulties, and the interest rate of the loan does not have to be preferential, but the number is enough to help the enterprise cope with the crisis. The third is to delay the introduction of other policies that have a great impact on the real estate market in the near future. There is widespread concern that the real estate tax will be introduced in the near future, which will once again have a serious negative impact on real estate sales in the near future. Real estate taxes are a long-term solution that needs to be done and should be done, but a more reasonable time needs to be found.
Boost the growth rate of social financing in the whole society and enrich the cash flow of other industries and departments. In order to prevent the downward transmission of the real estate market to other industries and sectors, prevent the ever-enlarging negative feedback mechanism, and also to boost the vitality of the current overall economy, the main measures that need to be taken include: 1. Reduce interest rates, which on the one hand reduce the debt costs of enterprises and residents, on the other hand, help to improve the valuation of the assets they hold, strengthen the balance sheets of enterprises and residents and the ability to cope with negative shocks. 2. Increase public sector debt to support infrastructure construction investment. The advantage of this is on the one hand to make up for the drag on infrastructure investment caused by the decline in local government land revenues; on the other hand, it is also a rare opportunity to get rid of excessive dependence on land finance.
The supply elasticity of upstream industries and related products should be improved as soon as possible to alleviate the upward trend of commodity prices. Reduce unnecessary administrative intervention in the supply of some commodities, and let the commodity market return to the market-oriented pricing mechanism as soon as possible. At the same time, the import restrictions on some upstream products will be moderately relaxed, and the current upward pressure on the prices of bulk commodities will be alleviated by market-oriented means.
The focus of macroeconomic policies is to enhance and maintain aggregate demand, achieve a stable macroeconomic connection between this year and next year, and avoid large economic fluctuations. Due attention should be paid to the important role played by infrastructure investment in stabilizing aggregate demand. Appropriately adjust the restrictions on the scope of use of special debt funds, and promote the landing of special debt funds as soon as possible and the formation of physical workload. Give full play to the space and potential of monetary policy, reduce the benchmark interest rate in a timely manner and drive the overall downward trend of market interest rates, reduce the cost of social financing, and stimulate the financing needs of the private sector. The mechanism of action of lowering interest rates to stimulate the economy is to reduce the cost of debt in the private sector, raise the price of assets in the private sector, make the balance sheet of the private sector stronger, and boost aggregate demand and economic vitality through the private sector.