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Key points:

Domestic demand is weak, consumption is sluggish, and comprehensive prices have continued to decline in the past five quarters. Domestic demand does not buy enough things, resulting in excess products of goods and service providers, and the growth potential of producers is also suppressed by insufficient demand. The biggest threat to my country's macro-economy is not external factors, but mainly comes from insufficient domestic demand caused by the distribution and social security system.

On August 15, the National Bureau of Statistics released macroeconomic statistics on fixed asset investment, real estate, industry, consumption, etc. for July. At this point, all statistical data for July have been released.

From investment to production, from domestic demand to exports, from finance to prices, all statistics point to one fact: our household income is seriously insufficient, domestic demand continues to be weak, consumption remains sluggish, and oversupply and insufficient demand have very clearly become shackles on investment and production, restricting economic recovery and affecting the effectiveness of the implementation of our monetary policy, fiscal policy and other economic measures.

1. Domestic demand is weak and consumption is sluggish, and overall prices have continued to decline in the past five quarters.

New data released by the National Bureau of Statistics and other agencies highlight the severity of domestic consumption problems.

1. Retail sales growth was only half the growth of industrial output.

According to data released by the National Bureau of Statistics, in July, my country's total retail sales of consumer goods reached 3.7757 trillion yuan, up 2.7% year-on-year; among them, retail sales of goods increased by 2.7% and catering sales increased by 3%. Stimulated by large-scale price cuts and local incentives for old-for-new exchanges, the benchmark automobile sales fell by 4.9% year-on-year.

2. Commercial housing sales have been declining sharply for three consecutive years.

my country's commercial housing sales began to decline in July 2021, and with the continuous increase in unprecedented rescue measures, it has continued to decline for 37 months. The commercial housing sales calculated using the data from January to July and January to June were 619.7 billion yuan, a year-on-year decrease of 24.1%;

Data from the third-party China Index Academy showed that in July 2024, the sales of the TOP100 real estate companies fell by 19.4% year-on-year and 35.2% month-on-month, and the scale of monthly performance continued to remain at a historically low level.

3. The growth rate of service retail sales has dropped significantly.

The National Bureau of Statistics did not release service retail sales, but through the cumulative growth rate of service retail sales, it can be estimated that service retail sales in July increased by 5.4%, which is 2.1 percentage points lower than the 7.5% growth rate of service retail sales in the first half of the year.

4. Since the second quarter of 2023, my country's comprehensive price level measured by the GDP price reduction coefficient has continued to fall for more than five quarters.

Because the National Bureau of Statistics does not release comprehensive consumption data, such as monthly household consumption expenditure and service retail sales, it is impossible to fully measure the extent of the consumption downturn simply from the sales volume.

However, it is a basic market law that when supply exceeds demand, prices rise, and when supply exceeds demand, prices fall. Since many of our basic prices are controlled by the price department managed by the National Development and Reform Commission, such as water, electricity, gas, transportation prices, education and medical prices, energy prices, etc., even if there is an oversupply of these prices or international market prices fall, the National Development and Reform Commission will still push for price increases. Therefore, our comprehensive prices have not yet fully reflected the supply and demand relationship, but they reflect the changing trend of the prices of market-oriented goods and services.

Even so, except for the CPI, which includes a large number of prices controlled by the National Development and Reform Commission, which rose by 0.5% year-on-year in July, other prices fell to varying degrees. Among them, the PPI fell by 0.8% year-on-year, the price of new houses fell by 4.2% year-on-year, and the price of second-hand houses fell by 8.8% year-on-year. The latest "July National Large and Medium-sized Cities Rental Average Price Report" released by Zhuge Research Institute shows that the average rental price in large and medium-sized cities across the country in July was 34.81 yuan/square meter/month, a month-on-month decrease of 0.01% and a year-on-year decrease of 1.83%. It has been falling for 9 consecutive months.

Second, domestic demand does not buy enough things, resulting in an oversupply of products by companies providing goods and services, and the growth potential of companies is also suppressed by insufficient demand.

For a long time, we have relied on exports to absorb excess production capacity relative to domestic demand. In July, commodity exports increased by 6.5% year-on-year, and from January to July, commodity exports increased by 6.7% year-on-year, which were 2.4 times and 1.9 times the growth rate of social commodity retail sales, respectively.

However, on the one hand, the supply of some products cannot be exported, such as real estate, medical care, education, etc. On the other hand, the growth space of external demand is also limited. When our exports have a greater impact on similar industries in other countries, these countries will restrict our exports through trade measures such as increasing tariffs. Therefore, although almost all of our economic stimulus measures are concentrated on the production side, the impact of insufficient domestic demand on production is still increasing.

The continued slowdown in domestic demand has affected the growth of fixed asset investment. In July, the growth rate of fixed asset investment fell from 3.9% in January-June to 1.9%.

Amid weak household demand, policymakers prioritized manufacturing to support economic growth, but weak domestic consumption also pulled down industrial output and pushed up product inventories in the industrial sector. In July, industrial value-added grew 5.1% year-on-year, 0.9 percentage points lower than the 6% growth in the first half of the year. The growth rate of industrial production in July was the lowest in four months, which added pressure on the economic recovery in the third quarter.

Judging from the order index in the Purchasing Managers' Index, insufficient demand has had a significant impact on enterprises. In July, the new order index in the manufacturing PMI was 49.3%, which was in the contraction zone for the third consecutive month, and the non-manufacturing new order index was 45.7%, which was in the contraction zone for the 15th consecutive month.

Due to insufficient orders, the manufacturing PMI was 49.4%, in the contraction zone, and the non-manufacturing PMI was 50.2%, on the edge of the contraction zone. Both PMIs declined for the fourth consecutive month.

The divergence between companies' expansionary production and contractionary new orders suggests that supply-side activity data may continue to outperform demand-side activity data, which is bound to put continued downward pressure on commodity prices.

Financial data also clearly reflect the impact of insufficient demand on enterprises' expansion of production. In July, new loans to enterprises and institutions amounted to 130 billion yuan, down 45.3% year-on-year. Among them, new medium- and long-term loans fell by 52.1%. Non-financial corporate deposits decreased by 178 million yuan, down 250 billion yuan year-on-year.

3. The biggest threat to my country's macro-economy is not external factors, but mainly comes from insufficient domestic demand caused by the distribution and social security system.

As we face an increase in external demand for Chinese-made products, the risks of overseas demand are also increasing. Our commodity exports are being squeezed by the tariff increases in the United States and the European Union. The United States, the European Union, Thailand, South Korea and some other countries are preparing to impose tariffs on small packages of our international e-commerce to curb the impact on their small and micro businesses. These trade disputes are important because after the trade tariffs and small package tariffs take effect, the world's factory may face a decline in overseas demand for some of its export products, and the possible shrinkage of overseas orders will definitely have an impact on my country's production.

But this may not be the most immediate threat to our macroeconomy. Instead, weak domestic demand seems to be a more pressing issue. Although exports may continue to support economic growth in the coming months, they certainly cannot make up for the losses caused by the sluggish domestic demand. Conversely, when exports decline due to shrinking external demand, domestic demand cannot make up for the impact of shrinking exports on the economy. We should face up to the fact that the economic challenges we face include weak consumer confidence and demand.

The National Bureau of Statistics also acknowledged this. On July 15, the bureau said at the end of the article "The National Economy Was Generally Stable and Developed Steadily in the First Half of the Year" that "we should realize that the external environment is complex and intricate, domestic effective demand is still insufficient, and the foundation for a healthy economic recovery and growth still needs to be strengthened."

The lack of effective domestic demand is reflected in the decline of real estate, stock market fluctuations and population shrinkage. In fact, it is due to the fact that the proportion of labor income in the distribution system is too small and the level of social security is too low. The proportion of labor wage income in GDP is about 65% on average internationally, about 75% in developed countries, and about 45% in China. In terms of social security, most flexible employment workers and rural laborers lack unemployment insurance, and the pensions of these people are too small to maintain the most basic life.

In addition, economic uncertainty has led to weak confidence and risk hedging among middle- and high-income consumers, who are spending their money on savings rather than investments or general consumption and services.

Weak consumer demand is obviously bad for the economy as it could lead to a vicious cycle of deflationary pressures against the backdrop of slower wage growth and consumer spending.

Therefore, Saburo believes that the most direct threat to the Chinese economy is not external threats, but sluggish internal demand.

After the release of monthly data for July, the central bank said it would adopt new policies to help boost economic growth.

Pan Gongsheng, governor of the People's Bank of China, stated: "First, we will increase our implementation efforts to make (monetary policy adjustments) more effective; second, we will further plan new incremental policies in accordance with the central government's requirements."

But Saburo believes that solving the problem of weak domestic demand is beyond the central bank's capabilities. Weak credit data caused by household and corporate deleveraging has proved this point, resulting in the current monetary policy being ineffective. Boosting confidence and demand-side policies requires a higher level of reform of the national income distribution system and social security system.

【Author: Xu Sanlang】