The probability of a new demand gap in China's economy again in the coming months is not small. This may not be a secondary bottoming out in the strict sense, but it poses substantial challenges to macro policy.
——Zhu He, Young Researcher of China Finance Forty Forum (CF40).
Hazy inflection point
Text | Zhu He
After the epidemic, China's economic recovery began in the second quarter of last year and accelerated in the third quarter, and it has been one year now.
By May, the two core factors underpinning the current economic recovery had not weakened significantly: strong exports and resilient property investment. Residents' consumption is still slowly and stubbornly recovering, manufacturing investment is ushering in a new round of small yangchun, infrastructure investment is still tepid.
The focus of the market is increasingly on when the Fed blows the wind for the balance sheet reduction, and the domestic economy seems to have nothing to worry about, and there is no new story to tell.
In fact, the hazy inflection point has appeared in the field of vision. China's economy is not as simple as a new story.
First of all, the fastest stage of macro recovery has passed, and the recent recovery process has slowed down significantly.
The fastest period of this round of economic recovery should be the fourth quarter of 2020, and the year-on-year growth rate of most macro data in the month reached a high point in the fourth quarter of last year. Entering the first quarter of 2021, affected by the base effect, the year-on-year growth rate of various macro indicators has been distorted, which has increased the difficulty of judging the actual operation of macro.
To eliminate the cardinality effect, the common approach is to make a geometric average of the data for two consecutive years, and the results show (Table 1) that almost all macro data is below the level of December 2020, including real estate investments. This shows that although the recovery is still continuing, the second-order change has been negative, which is a more typical criterion for the recovery to enter the later stage.
Table 1: Comparison of macro data performance in the fourth quarter of 2020 and 2021 so far
Note: The PMI is raw data. Industrial added value, total social retail sales, infrastructure investment, manufacturing investment, real estate investment and total exports are all year-on-year growth rates in the current month, and the year-on-year data from February to May 2021 have been treated geometrically for two consecutive years.
Secondly, the impact of the Yongmei incident and the normalization of monetary policy is still continuing, and the impact of credit marginal contraction will gradually be reflected.
We have been able to observe (Figure 1) that the sheer size of corporate bond financing has never returned since peaking in November last year.
One reason is that the Yongmei incident essentially broke the belief in rigidity, and the credit spread between different rating bonds was very obvious. Within the urban investment bonds, the interest rate of low-rated urban investment bonds has increased significantly compared with high-rated urban investment bonds, indicating that the life of garbage urban investment is getting worse and worse. And the same AA-rating, the interest rate of urban investment bonds began to continue to be higher than corporate bonds, the last time this situation occurred was in 2018, when the background was to clean up and rectify local hidden debts, and it was also to break the rigidity. The collapse of rigid faith inevitably leads to a decline in investors' risk appetite and makes it difficult and uneconomical for companies to issue bonds.
Another important reason is the tightening of the overall financing environment, which reflects the continuing impact of monetary policy normalization. Compared with loans, corporate bond issuance is more sensitive to changes in the financing environment. At the same time, the early repayment of principal and interest by companies also shows the same expectation that financial tightening is a continuous process, not a one-time shock.
The effects of a slowdown in credit expansion will not be immediate, but sooner or later they will happen. From the perspective of historical experience, credit changes represented by M2 and social finance are often about three quarters ahead of economic changes. M2 and social finance have peaked in October 2020 and gradually declined. If the historical experience remains true, then after entering the third quarter, the inhibitory effect of the marginal contraction of credit on aggregate demand will begin to manifest and last for at least a year.
Figure 1: Corporate Debt Financing
Finally, more and more high-frequency data show signs of weakening.
In the case of distorted year-on-year data, it is more feasible to use high-frequency data to track macroeconomic marginal changes.
As shown in Figure 2, the improvement of indicators reflecting downstream and terminal demand, such as passenger car consumption, all-steel tire construction, and cement depot sales ratio, has basically ended, and even decreased compared with previous years. The only thing that remains high is daily coal consumption, which can be explained by seasonal changes in the recent downturn.
In addition, the real estate sales performance of 30 large and medium-sized cities is also very good, but most of the sample cities are first- and second-tier developed areas, which is difficult to reflect the situation of a wider range of third-tier cities and below in the country.
Figure 2: Indicator improvements reflecting downstream and terminal demand are essentially over
As mentioned earlier, the main forces underpinning this recovery have come from real estate investment and exports, which rely on an accommodative financing environment and strong overseas demand, respectively.
The loose financing environment is already a thing of the past, so under the premise of weak infrastructure investment, even if exports can be maintained at a high level, whether the gap opened by the decline in real estate investment can be filled by manufacturing investment and consumption is the key to determining whether there will be a new demand gap in the future. (It should be said that the assumption of "weak infrastructure investment" is not harsh, because the current emphasis on local government debt risk is not less than in 2018, and the assumption of "exports remaining high" is more optimistic.) ）
The growth rate of this round of real estate investment in the current month is basically synchronized with M2 and social financing, which gradually declined after peaking in the third quarter of last year. In May, residents' new medium- and long-term loans decreased compared with last year, which may indicate that the effect of the previous policy of restricting banks' housing-related loans has gradually emerged, and the speed of residents' leverage will further slow down in the future.
The main driver of the recovery in manufacturing investment has come from the rapid growth of exports, but the marginal contribution of exports has basically disappeared. In the future, even if we can see the rapid recovery of developed countries, it is more reflected in the recovery of the service industry, which is difficult to continue to stimulate the domestic economy through exports.
On the consumer side, the recovery of automobile consumption is the best performer, and the absolute value has returned to the level of 2019, officially out of the deep adjustment period of 2018-2019. However, it is precisely after returning to the 2019 level that the recovery momentum of automobile consumption is obviously insufficient, while the recovery performance of other non-auto durable goods consumption is quite average. The service consumption reflected in the box office is still quite far from the level of previous years.
The recovery in consumption itself depends on an increase in income, which in turn is closely related to the overall economic boom. It is not so much that consumption will drive economic growth, but rather that it will be difficult for consumption to return to normal levels until the economy is fully recovered.
In summary, the probability of a new demand gap in China's economy again in the next few months is not small. This may not be a secondary bottoming out in the strict sense, but it poses substantial challenges to macro policy.
For monetary policy, the need to prevent inflation has been greatly reduced. The fastest time for China's economic recovery has passed, and the momentum of recovery is weakening. If we haven't seen the economy overheat across the board before, the probability of seeing the economy overheating across the board is already very low, and we're more likely to face deflationary pressures rather than inflationary pressures in the future.
For macroprudential policies, the next step is to pay close attention to the exposure of credit risks caused by the economic slowdown, which are mainly concentrated in the relevant debts of local small and medium-sized banks and local urban investment platforms, as well as loans for small and micro enterprises that have expanded on a large scale in the previous stage.
Fiscal policy should be more fussed about at the structural level, the most critical of which is to improve the efficiency of the use of special bonds, in order to stabilize infrastructure investment and avoid repeating the situation in 2018.
attach:
CF40 Macro Doctor May 2021 Report Sheet
Text | CF40 Senior Researcher Zhang Bin
CF40 Young Researcher Zhang Jiajia
Macroeconomic operations
◆ The degree of economic prosperity has declined. The official manufacturing PMI was 51.0 in May, down 0.1 percentage points from April. The manufacturing PMI for large and medium-sized enterprises was 51.8 and 51.1, up 0.1 and 0.8 percentage points respectively from April, and the manufacturing PMI for small businesses was 48.8, down 2.0 percentage points from April.
◆ The industrial sector maintains a high degree of vitality. In May, the added value of industries above designated size in the country increased by 8.8% year-on-year, 0.5% month-on-month, and an average growth of 6.6% in two years. In terms of major categories, the manufacturing industry increased by 9.0% year-on-year, with an average growth of 7.1% in two years; the added value of the mining industry increased by 3.2% year-on-year, an average growth rate of 2.1% in two years; the electricity, heat, gas and water production and supply industry increased by 11.0% year-on-year and an average growth of 7.2% in two years; the general equipment and special equipment manufacturing industry increased by 13.8% and 5.9% year-on-year, and the average growth rate of 10.5% and 11.0% in two years.
◆ Export growth slowed, imports grew high, and trade surpluses expanded slightly. The value of U.S. dollar-denominated exports in May increased by 27.9% year-on-year, an average increase of 11.1% in two years, down 5.7 percentage points from April. The amount of imports increased by 51.1% year-on-year, an average increase of 12.4% in two years, up 1.7 percentage points from April. The trade surplus in May was $45.54 billion, up $2.68 billion from the previous month. In terms of countries and regions, the average growth rate of exports to the United States, the European Union, Japan, South Korea and ASEAN in two years was 9.1%, 5.8%, 8.0%, 11.7% and 15.1%, down 6.7, 3.0, 7.5, 3.9 and 6.6 percentage points respectively from April.
◆ Recovery of consumption growth. In May, the total retail sales of consumer goods increased by 12.4% year-on-year, 0.8% month-on-month, and an average growth of 4.5% in two years. Auto sales increased by 6.3% year-on-year, with a two-year average growth of 4.9%. From January to May, the national online retail sales increased by 24.7% year-on-year. Among them, the online retail sales of physical goods increased by 19.9% year-on-year, accounting for 22.6% of the total retail sales of consumer goods.
◆ The investment in fixed assets has resumed growth. From January to May, the cumulative growth rate of fixed asset investment in the country was 15.4% year-on-year, with an average growth rate of 4.2% in two years; in May, it increased by 0.2% month-on-month. The cumulative growth rate of private fixed asset investment was 18.1% year-on-year, with an average growth rate of 3.7 percentage points in two years. Among them, the cumulative investment in manufacturing industry increased by 20.4% year-on-year, with an average growth rate of 0.6 percentage points in two years; the cumulative growth rate of infrastructure investment in the tertiary industry was 11.8% year-on-year, with an average growth rate of 2.6 percentage points in two years; the cumulative increase in real estate development investment was 18.3% year-on-year, and the average growth rate of two years was 8.6 percentage points. From January to May, the cumulative sales area of commercial housing increased by 36.3% year-on-year, with an average growth rate of 9.3 percentage points in two years; the area of newly started construction increased by 6.9% year-on-year, an average decrease of 3.5 percentage points in two years.
◆ CPI and PPI continue to rise. The CPI increased by 1.3% year-on-year in May, up 0.4 percentage points from April. Among them, non-food prices increased by 1.6% year-on-year, up 0.3 percentage points from April; food prices increased by 0.3% year-on-year, up 1.0 percentage points from the previous month. The core CPI, excluding food and energy, increased 0.9% year-on-year, up 0.2 percentage points from April. Affected by the rise in upstream raw material prices, the PPI in May increased by 9.0% year-on-year, up 2.2 percentage points from April.
Macroeconomic operating environment
◆ The external economic boom continued to improve, and commodity prices rose significantly. JPMorgan's Global Composite PMI was 58.4 in May, up 1.7 percentage points from April, and JPMorgan's Global Manufacturing PMI was 56.0, up 0.1 percentage points from April. The U.S. manufacturing PMI rose to 61.2 from 60.7 April, the euro area manufacturing PMI rose to 63.1 from 62.9 April, and the Japanese manufacturing PMI fell back to 53.0 from 53.6 April. CRB spot prices for commodities increased 4.4% sequentially.
◆ The growth rate of social financing stock has declined. M1 grew at 6.1 percent year-on-year in May, down 0.1 percentage points from April, and M2 grew at 8.3 percent year-on-year, up 0.2 percentage points from April. The stock of social financing scale increased by 11.0% year-on-year, down 0.6 percentage points from April. May,
◆ The new social financing was 1.9 trillion yuan, an increase of 0.1 trillion yuan over April. Among them, the government's new debt (national debt + local debt + special debt) was 0.7 trillion yuan, an increase of 0.3 trillion yuan over April; the new debt of enterprises was 0.6 trillion yuan (including the new debt of local financing platform enterprises), down 0.3 trillion yuan from April; and the new debt of residents was 0.6 trillion yuan, an increase of 0.1 trillion yuan from April.
◆ 7-day repo rate recovered. The 7-day interbank repo rate averaged 2.18% in May, up 4 basis points from April. The short-term liquidity spread represented by the difference between the 3-month SHIBOR and the 3-month Treasury yield rebounded by 3 basis points from April to 0.64%,; the difference between the 10-year yield and the 1-year Yield rose by 9 basis points to 0.78%,; and the credit spread represented by the difference between the 10-year AA yield and the 10-year Treasury yield rebounded by 2 basis points to 1.66%.
Near-term outlook and risk warnings
◆ The economy is in the recovery stage, the export and industrial sectors are relatively good, consumption has not yet been fully rid of the negative impact of the epidemic, and the growth rate of infrastructure and fixed asset investment is at a low level.
◆ The core CPI is at a low level, and the demand for consumer terminals 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 of the domestic economy in the future are the growth rate of generalized credit, excessive decline in infrastructure investment and real estate market, and concentrated exposure of risks in the financial sector.
Diagnostic recommendations
◆ A relaxed policy environment is needed to support the recovery of aggregate demand, and the recent policy focus is on maintaining a low and stable interbank market financing interest rate and thus maintaining a low financing cost.
◆ Explore new economic growth points through various forms of reform pilot zones. Different cities have set up reform pilot zones with different positioning and functions, and each pilot zone can focus on a certain aspect of reform at the beginning.
Macroeconomic operation test report sheet
Macroeconomic Environment Test Report Sheet
The CF40 Macroeconomic Doctor Series (CMD) is a macroeconomic research project led by Zhang Bin, senior researcher of the China Finance Forty Forum (CF40). The project is mainly based on the perfect database and meticulous data processing to form a concise and concise macroeconomic operation physical examination report; combined with the macroeconomic operation physical examination and appropriate macroeconomic analysis framework, to find the main problems in macroeconomic operation; with the help of appropriate macroeconomic analysis framework and quantitative research, put forward countermeasures to solve the main problems of macroeconomic operation in the current period; and carry out thematic analysis of some medium- and long-term problems in macroeconomic operation.