Luo Zhiheng: The divergence of July data cannot hide the downward pressure, and "maintaining 5% growth" requires more powerful macroeconomic policies

2024-08-15

Chief Economist and Director of Research Institute of Guangdong Securities: Luo Zhiheng

summary

The main contradiction in the current economy is the imbalance between supply and demand caused by insufficient effective domestic demand, which in turn leads to a divergence between the actual economic growth rate and the nominal economic growth rate, and between macro data and micro perceptions. Residents and businesses do not feel a strong sense of gain from economic recovery, which drags down expectations and confidence, and effectively boosts consumption and investment.

Economic differentiation continues: first, supply is better than demand;The growth rate of industrial added value above designated size was significantly higher than that of consumption and investment;Second, external demand is better than domestic demand.The recent growth rate of exports has been significantly higher than that of domestic demand;Third, the industry is better than the service industry.The main reason is that the real estate industry is a significant drag, while equipment upgrades and exports drive industrial production and investment;Fourth, central fiscal expenditure and the central infrastructure investment it has driven are significantly better than local infrastructure investment.In the first half of the year, the growth rate of central fiscal expenditure was 9.6%, much higher than the 0.6% growth rate of local fiscal expenditure. From January to July, the cumulative year-on-year growth of central expenditure-related railway and water conservancy investment was as high as 17.2% and 28.9%, while the cumulative year-on-year growth of local-related road transportation and public facilities management investment was as low as -2% and -4.7%. It is necessary to solve some local debts through treasury bond refinancing, policy financial institutions, and the issuance of special refinancing.BondsResolve local fiscal pressure and local government emergency situations as soon as possible through other means;Fifth, the macro is better than the micro.Macro data is better than micro feelings, the nominal growth rate is lower than the actual growth rate, and downward pressure on prices still exists. We must solve the imbalance between supply and demand from the institutional and mechanism levels (changing the institutional barriers that focus on supply and neglect demand, shifting the principle of taxation at the place of production to taxation at the place of consumption, shifting from construction finance and food finance to people's livelihood finance, urbanizing migrant workers, promoting transfer payments to follow people, and no longer using expensive residential land to make up for low-priced industrial land), rather than simply adopting policies of reducing supply on the supply side or expanding demand on the demand side.

1. Data divergence cannot hide downward pressure, and the positive trend of economic recovery still needs to be consolidated and strengthened.

Economic data in July showed divergence: the growth rates of service industry and industry increased and decreased respectively.The service industry production index increased by 4.8% year-on-year, and the industrial added value increased by 5.1% year-on-year, up 0.1 and down 0.2 percentage points from the previous month respectively;The growth rates of consumption and investment increased and decreased respectively.The total retail sales of consumer goods increased by 2.7% year-on-year in the month, and the cumulative amount of fixed asset investment increased by 3.6% year-on-year, up 0.7 and down 0.3 percentage points from the previous month respectively.

However, the above data deviates from the PMI and price data:In July, the manufacturing and service industries weakened simultaneously, with the PMI index falling by 0.1 and 0.2 percentage points respectively.CPIThe year-on-year growth rate fell to 0.4% from 0.6% in June, reflecting that consumption is still sluggish.

In fact, the overall economic performance in July was weak. The year-on-year growth rate of service industry production and retail consumption rebounded, which was more affected by the base effect.The month-on-month and two-year average growth rates of the service industry production index in July 2023 were both low points for the whole year, down 1.1 and 0.9 percentage points from June, respectively. In comparison, the 0.1 percentage point increase in July this year is negligible. The 618 e-commerce promotion activities were advanced this year, resulting in a high year-on-year increase in social retail consumption in May and a low year-on-year increase in June. If May and June are combined, the year-on-year growth is 2.8%, higher than 2.7% in July.

Among fixed asset investments, real estate, manufacturing, and narrow infrastructure investment have decreased year-on-year, while broad infrastructure investment has increased year-on-year. First, the stimulus effect of the 517 real estate policy has weakened.In July, real estate sales area, sales volume and real estate investment decreased by 15.4%, 18.5% and 10.8% year-on-year, respectively, with the decline widening by 0.9, 4.2 and 0.7 percentage points from the previous month.Second, the imbalance between supply and demand has dragged down manufacturing investment.The automobile manufacturing and electrical machinery and equipment manufacturing industries were particularly typical, with cumulative year-on-year investment in January-July increasing by 5% and 1.4%, respectively, down 1.5 and 2.1 percentage points from January-June.Third, the issuance of special bonds and municipal bonds in July was still low, and local infrastructure investment continued to be sluggish.From January to July, the road transport industry and public facilities management industry decreased by 2% and 4.7% year-on-year, respectively, with the decline expanding by 1 and 0.2 percentage points from January to June.Fourth, investment in electricity, railways and water conservancy still maintained high double-digit growth and was the main force supporting infrastructure investment.

2. Three hidden lines in the current economic operation

First, since the second quarter of 2023, the balance of personal housing loans has shown negative growth for the first time year-on-year, and the decline has continued to expand. The reason behind this is that residents have actively reduced leverage and repaid loans in advance.The main reason for residents to repay their loans in advance is the high interest rates on existing mortgage loans. As housing prices and stock prices continue to be sluggish, bank deposit rates and financial management yields are falling, repaying loans in advance has become the "financial management method" with the highest yield. After residents repay their loans in advance, their liquidity decreases and their spending power also declines. In addition, some residents use consumer loans or business loans in violation of regulations to repay their loans in advance, which will further increase risks in the financial and real estate markets.

Second, the current overall consumption is sluggish. In addition to the unstable employment and income expectations of residents and the need to boost consumption willingness and ability, it is also related to companies reducing costs and increasing efficiency, and reducing office and travel related expenses.Corporate consumption is also an important part of overall consumption. Among the total retail sales of consumer goods, household consumption accounts for only about half, and the other half is social group consumption, that is, non-production and non-business goods sold to government agencies, enterprises, institutions, etc. through transactions. Since 2023, the cumulative year-on-year negative growth in the retail sales of cultural and office supplies has continued.

Third, since June this year, the unemployment rate of migrant workers has risen, and the unemployment rate of migrant workers with non-local agricultural household registration has increased from 4.5% in May to 4.9% in July, which is higher than 4.8% in July last year.Migrant workers are mainly employed in manufacturing, construction, transportation and warehousing, wholesale and retail, accommodation and catering, and resident services. First, the demand for manufacturing employment has decreased, and the manufacturing PMI has been below the boom-bust line for three consecutive months; second, employment in the construction industry has decreased due to the sluggish real estate investment and local infrastructure investment, as well as the extreme heavy rainfall and high temperature weather that restrict construction; third, the consumption of residents and enterprises is sluggish, and the service industry is in a downturn.

3. Maintaining a 5% annual economic growth rate requires continued and more effective macroeconomic policies

The overall pace of economic operation this year may be similar to that of last year, but the quarter-on-quarter economic momentum in the first and second quarters was weaker than that of the same period last year.If the quarter-on-quarter growth rate in the third and fourth quarters returns to the same period last year, thenGDPThe year-on-year growth rates were 4.7%, and the annual growth rate was 4.8%, which was lower than the growth target of "around 5%" set at the beginning of the year.

With the convening of the Third Plenary Session of the 20th CPC Central Committee and the 730 Political Bureau meeting, all regions and departments have accelerated the implementation of reform and stable growth policies. It is expected that the quarterly GDP growth rate in the third and fourth quarters will be stronger than the same period last year.The base in the second quarter of this year is lower, the determination and force of the stable growth policy in the third quarter are greater, and the policy continuity in the fourth quarter is stronger. Assuming that the month-on-month growth rate in the third and fourth quarters is 0.2 percentage points faster than the same period last year, the GDP in the third and fourth quarters will be 4.9% and 5.1% year-on-year respectively, and the annual growth rate will be 5%.

Macroeconomic policies must continue to be implemented with greater force, accelerate the full implementation of the determined policy measures, and reserve and introduce a batch of incremental policy measures in a timely manner.In terms of fiscal policy, we can consider increasing the deficit and issuing more treasury bonds, speeding up the issuance of special bonds, and optimizing "debt reduction" measures; in terms of monetary policy, we can further lower the reserve requirement ratio and interest rates, actively use structural monetary policy tools, and lower the interest rates on existing mortgage loans; in terms of real estate policy, it is necessary to continue to relax purchase restrictions, increase central fiscal support for local governments' land purchases and storage, and sell high-quality land.

Risk Warning:External shocks exceeded expectations, and policies to stabilize growth exceeded expectations

Table of contents

1. Three sets of bright and dark lines in the current economy

1. Stimulating new housing demand vs. residents repaying their loans in advance

2. Boosting household consumption vs. sluggish corporate consumption

3. Promoting employment for college graduates vs. rising unemployment rate for migrant workers

2. Maintaining a 5% annual economic growth rate requires continued and more effective macroeconomic policies

III. Policy recommendations for the next stage

text

1. Three sets of bright and dark lines in the current economy

All sectors of society have a full understanding and broad consensus on the current downturn in the real estate market, sluggish consumer spending, and employment difficulties for college graduates, and macroeconomic policies have also actively responded to them. However, other problems that accompany them have not received enough attention, resulting in weak policy support, such as high interest rates on existing mortgage loans causing residents to repay their loans in advance, sluggish corporate consumption in social retail consumption, and rising unemployment rates for migrant workers in the labor market.

1. Stimulating new housing demand vs. residents repaying their loans in advance

To solve the continued sluggish real estate sales and investment, the key is to stimulate residents' demand for housing purchases. Therefore, various regions have intensively introduced policies such as relaxing purchase restrictions, lowering down payment ratios and mortgage interest rates, and providing housing purchase subsidies to encourage residents to increase leverage.However, since the second quarter of 2023, the balance of personal housing loans has shown negative growth for the first time year-on-year, and the decline has continued to expand. The reason behind this is that residents have actively reduced leverage and repaid loans in advance.First quarter of 2024Commercial BanksNew personal housing loans of 1.3 trillion yuan were issued, but the balance of personal housing loans only increased by 20 billion yuan. The gap of about 1.3 trillion yuan was due to early repayment of loans in addition to residents' normal monthly repayments.

The main reason why residents repay their loans early is that the interest rates on existing mortgages are relatively high. As housing prices and stock prices continue to be sluggish, and bank deposit rates and wealth management yields decline, early repayment of loans has become the "wealth management method" with the highest yield.After residents repay their loans in advance, their liquidity is reduced and their spending power also declines. In addition, some residents use consumer loans or business loans in violation of regulations to repay their loans in advance, which will further increase the risks in the financial and real estate markets.

In August 2023, relevant departments introduced a policy to lower the interest rates on existing first-home mortgage loans, but required that the adjusted interest rate could not be lower than the lower limit of the first-home mortgage interest rate policy in the city where the original loan was issued. This resulted in some existing mortgage interest rates remaining high.Taking Beijing as an example, the interest rate for existing first-home mortgages from October 2019 to December 2023 is LPR+55BP, while the current interest rate for new first-home mortgages is LPR-45BP, and even the interest rate for second-home mortgages within the Fifth Ring Road is only LPR-5BP. Taking a 25-year, 3 million yuan equal principal and interest existing mortgage as an example, if the 55BP surcharge is cancelled, the monthly payment will be reduced by nearly 1,000 yuan, which can effectively reduce the burden of loan repayments on residents and enhance their consumption capacity.

2. Boosting household consumption vs. sluggish corporate consumption

The sluggish consumption is one of the important reasons for the current insufficient effective domestic demand. The 730 Politburo meeting proposed that "domestic demand should be expanded with a focus on boosting consumption, and the focus of economic policies should be shifted more to benefiting people's livelihood and promoting consumption."

There is usually a misunderstanding when the market analyzes consumption: it believes that consumption is mainly household consumption, and the corporate sector is mainly involved in investment, thus ignoring corporate consumption.In fact, corporate consumption is also an important part of overall consumption. Among the total retail sales of consumer goods, household consumption accounts for only about half, and the other half is social group consumption, that is, non-production and non-business goods sold to government agencies, enterprises, institutions, etc. through transactions.

The current overall consumption is sluggish. On the one hand, residents' employment and income expectations are unstable, and their willingness and ability to consume need to be boosted; on the other hand, companies are reducing costs and increasing efficiency, cutting office, travel and other related expenses.Since 2023, the cumulative year-on-year retail sales of cultural and office supplies have continued to show negative growth.

3. Promoting employment for college graduates vs. rising unemployment rate for migrant workers

College graduates and migrant workers are the focus of employment policies. In recent years, the number of college graduates has continued to rise, but employment opportunities have not grown at the same pace, resulting in a more prominent problem of employment difficulties for college graduates, which has attracted widespread attention from the society. The employment of migrant workers is relatively stable. Since March 2023, the urban survey unemployment rate of migrant workers with agricultural household registration has continued to be lower than the overall unemployment rate.

However, since June this year, the unemployment rate of migrant workers has risen, and the unemployment rate of migrant agricultural population has increased from 4.5% in May to 4.9% in July, which is higher than 4.8% in July last year.Migrant workers are mainly employed in manufacturing, construction, transportation and warehousing, wholesale and retail, accommodation and catering, and resident services. First, the demand for manufacturing employment has decreased, and the manufacturing PMI has been below the boom-bust line for three consecutive months; second, employment in the construction industry has decreased due to the sluggish real estate investment and local infrastructure investment, as well as the extreme heavy rainfall and high temperature weather that restrict construction; third, the consumption of residents and enterprises is sluggish, and the service industry is in a downturn.

2. Maintaining a 5% annual economic growth rate requires continued and more effective macroeconomic policies

The overall rhythm of economic operation this year may be similar to that of last year: a good start in the first quarter, increasing downward pressure in the second quarter, the introduction of stable growth measures in the third quarter leading to an economic recovery, and the recovery trend continued in the fourth quarter but with a slight decline.

In the first half of the year, GDP grew by 5% year-on-year, continuing the overall upward trend.Among them, in the first quarter, various departments and local governments implemented the deployment of the Central Economic Work Conference, launched efforts and started construction ahead of schedule, and the economy started off better than expected, with a year-on-year growth of 5.3%; but the problems of insufficient macro aggregate demand and weak confidence of micro-entities still exist, and the foundation for economic recovery is not solid. The growth rate fell in the second quarter, with a year-on-year growth of 4.7%.

The pressure to maintain growth in the second half of the year has further increased, and the overall economic and financial data in July were weak.The quarter-on-quarter economic momentum in the first and second quarters of this year was weaker than the same period last year. The seasonally adjusted quarter-on-quarter GDP in each quarter of 2023 was 1.8%, 0.8%, 1.5% and 1.2% respectively, while the quarter-on-quarter growth rates in the first and second quarters of this year were 1.5% and 0.7% respectively. If the quarter-on-quarter growth rate in the third and fourth quarters of this year returns to the level of the same period last year, the year-on-year GDP growth rate in the third and fourth quarters will be 4.7%, and the annual growth rate will be 4.8%, which is lower than the growth target of "around 5%" set at the beginning of the year.

III. Policy recommendations for the next stage

In terms of fiscal policy, one is to study increasing the deficit and issuing more government bonds to make up for the slow spending caused by the decline in land transfer income and other factors, and to increase countercyclical adjustments.The additional treasury bonds can be used in three aspects: 1) Re-lending to some local governments with greater pressure to alleviate liquidity risks and promote local governments to return to normal from emergency status. 2) Giving partial subsidies to recent graduates who have not yet found jobs and unemployed university graduates and low-income urban and rural people to improve their risk resistance and consumption capacity and maintain social stability. 3) Investing in major projects of the "15th Five-Year Plan" in advance, while giving sufficient project reserve time to avoid the phenomenon of project packaging and low efficiency of capital use caused by temporary project search. The recent flood prevention situation is severe, and it is necessary to further strengthen water conservancy construction.Second, speed up the issuance of special bonds, on the one hand, relax the scope of use of special bonds, and on the other hand, consider adjusting some special bond quotas to general bonds. Third, optimize the "debt reduction" policy, create conditions to resolve the debt risks of financing platforms, and promote local governments to return to normal from emergency status.

In terms of monetary policy, first, the reserve requirement ratio should be lowered when necessary, and interest rates should be lowered when necessary to boost consumer spending and corporate investment demand.With regulators prohibiting banks from "manually making up interest", banks have recently lowered their deposit rates, and the Federal Reserve may start a rate cut cycle in September, the external constraints on monetary policy have gradually eased and policy space has gradually opened up.Second, actively use structural monetary policy tools to increase financial support for large-scale equipment upgrades, old-for-new consumer goods, and local governments' acquisition of existing commercial housing.As of June, only 0 yuan and 12.1 billion yuan of the 500 billion yuan re-loan for scientific and technological innovation and technological transformation and the 300 billion yuan re-loan for affordable housing had been used, respectively.The third is to lower the interest rates on existing mortgage loans, reduce the pressure on residents to repay their loans, and enhance their consumption capacity.Lowering the interest rate of existing mortgage loans will have a relatively controllable impact on the net interest margin of commercial banks, and can stabilize the scale of existing mortgage loans and curb the current illegal phenomenon of "rebates" by some banks in order to compete for mortgage business. Alternatively, it can be done in a market-oriented way, allowing existing mortgage loans to be "transferred to mortgages", and commercial banks can decide whether to "borrow new to repay old", which was implemented in 2008.

We will continue to optimize real estate policies and reverse the downward trend in real estate prices as soon as possible.It is necessary to further relax the purchase policies in first-tier cities, such as lifting restrictions on suburban purchases, large-sized apartments, and commercial and residential properties, cancelling the standards for ordinary and non-ordinary residential homes, reducing the social security requirements for non-local residents to purchase homes, and increasing housing purchase quotas for families with multiple children.Second, the cost of buying a house.On the basis of "different policies for different cities", various local governments have reasonably adjusted down payment ratios and mortgage interest rates, reduced transaction taxes and fees, provided housing purchase subsidies, etc., to lower the threshold and cost for residents to buy houses.Third, in terms of government storage,Increase central government financial support to local governments, ease local fiscal pressure, and promote the smooth progress of storage and purchase work.Fourth, on the supply side,Transfer high-quality plots of land, cancel unreasonable planning restrictions, and convert some commercial land in core areas into residential land to meet residents' demand for good locations and high-quality commercial housing.

Analyst: Luo Zhiheng, Practice Number: S0300520110001

Analyst: Ma Jiajin, Practice Number: S0300522110002

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Luo Zhiheng: The divergence of July data cannot hide the downward pressure, and "maintaining 5% growth" requires more powerful macroeconomic policies

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