Maintain Expansionary Macro Policy Before Real Estate Stabilizes
The economy continued to decline in the third quarter of this year, but there was some improvement in September. The policy shift at the end of September and the subsequent introduction of incremental policies have increased the likelihood of an economic rebound in the fourth quarter, raising the probability of achieving the 5% target for the year. However, there are still external risks, such as the uncertain pace of interest rate cuts by the Federal Reserve and the rising probability of Trump's victory in the US presidential election, which could impact foreign trade. Therefore, a calm response is needed at the policy level, and macroeconomic policies should maintain an expansionary stance before the real estate market stabilizes. In the long run, it is still necessary to emphasize the decisive role of the market, improve the business environment, stimulate private investment and innovation, and focus more on expanding consumption to enhance the economy's internal momentum and avoid long-term dependence on stimulus measures.
I. Views on Economic Trends
1. The economy showed a downward trend in the third quarter. From year-on-year data, the economy grew by 5.3% in the first quarter, 4.7% in the second quarter, and 4.6% in the third quarter.
The quarterly环比 data released by the National Bureau of Statistics shows that the economy bottomed out in the second quarter, with data showing a环比 growth of 1.5% in the first quarter, 0.5% in the second quarter, and 0.9% in the third quarter. However, this data is not consistent with other data. The manufacturing PMI was on average 0.4 lower in the third quarter than in the second quarter, and the service sector PMI was on average 0.3 lower in the third quarter than in the second quarter.
Advertisement
At the same time, looking at the SMEI (Small and Medium Enterprises Confidence Index) released monthly by Standard Chartered Bank, the average in the second quarter was greater than 50, while in the third quarter it was less than 50. From the monthly环比 data on industrial value-added, fixed asset investment, and retail released by the National Bureau of Statistics, there was no significant rebound in the third quarter compared to the second quarter. In terms of numbers, the third quarter was still relatively weak overall. If the policy does not shift, it will be very difficult to achieve the 5% target for the year.
2. The growth in the first three quarters largely depended on external demand. Data shows that of the 4.8% economic growth in the first three quarters, 1.14 percentage points came from net exports, meaning that nearly 1/4 of the growth came from external demand, while domestic demand was relatively weak. There are two major factors dragging down domestic demand: First, real estate, which is the third consecutive year of a 10% contraction in real estate investment; second, the implementation of fiscal policy is contractionary, with general fiscal expenditure down 2.9% year-on-year in the first eight months, while the budget passed in March should have increased by 7.9%, which has had a significant drag on economic growth in the second and third quarters.
3. The Chinese economy currently faces significant deflationary pressure, mainly reflected in the GDP deflator being negative, which is a relatively broad inflation indicator.
II. Outlook for the Fourth Quarter Economic Situation
1. The drag from the real estate market will continue, and market adjustments are ongoing. Although a series of policies have been introduced that are beneficial to the real estate market's stabilization, it is likely that stabilization will not occur until next year. Some recent measures are quite strong: First, from a monetary policy perspective, the interest rates on existing mortgages have been reduced, and on the fiscal side, the use of local special bonds has been expanded to allow for the reclamation of idle land and the purchase of existing housing. Second, the Ministry of Housing and Urban-Rural Development has announced a new round of urban village renovations, using monetary resettlement methods. Third, financial support for real estate projects on the whitelist will be further increased. Although these measures are beneficial to the development of the real estate market, they are unlikely to produce significant effects this year.2. Measures announced at the Ministry of Finance press conference are expected to transform fiscal policy from a drag on the economy to a driving force, with the fiscal impulse shifting from negative to positive.
Specifically, in the Ministry of Finance's press conference, the de-risking measures included two items: one was the capital injection into large banks, and the other was local debt management, which increased the debt quota of the central and local governments through replacement methods. These measures are beneficial in the long run, but their short-term impact on economic stimulation is limited.
The other two measures will directly bring substantial benefits to the real economy: First, arranging a 400 billion quota from the local debt balance limit to issue bonds to supplement local financial resources. This measure should be quickly implemented and is helpful in addressing the financial shortfall caused by the decline in tax revenue this year, avoiding expenditure cuts and maintaining fiscal strength. Second, expanding the use of special-purpose bonds, such as using them to purchase existing housing. If the use is not expanded, we estimate that about 1 trillion yuan of funds will be idle by the end of the year. Adding the 400 billion to the potentially idle 1 trillion yuan amounts to approximately 1.4 trillion yuan, and without measures, these expenditures will not occur.
Although we currently maintain our forecast of 4.8% economic growth for 2024, given the shift in macroeconomic policy in September, the possibility of actual growth exceeding our forecast has increased.
III. External Risks
1. Federal Reserve
If the Federal Reserve slows down the pace of rate cuts, it will have a certain impact on the monetary policy space of our country.
IV. Policy Recommendations
1. Macro and Real Estate Policies
Macro policies should remain loose before the real estate market stabilizes, playing a role in providing a safety net during the transition from old to new drivers. If Trump is elected, macro policies next year may need to be more expansionary than usual to counter external shocks.In terms of real estate policies, there is scope to think more broadly on the demand side, such as considering lifting purchase restrictions for foreign nationals to increase demand. At the same time, macroeconomic policies should focus more on promoting consumption.
Regarding the frequent delay in the implementation of fiscal policies compared to the budget, with funds often left unused and idle at the end of the year, it could be considered to use the remaining funds each year for tax cuts for low-income groups or to increase subsidies, using them up in the same year to achieve the intended effects of the budget.
2. Policy Orientation
Regardless of changes in domestic and international situations in recent years, we have implemented proactive fiscal policies and prudent monetary policies. Such policy positioning has lost its signaling function. Proactive and prudent are more about expressing the attitude when implementing policies, rather than conveying the direction and intensity of the policies. It is suggested to use objective and measurable wording, drawing on the pre-2008 macro policy descriptions, such as "tight," "moderately tight," "neutral," "moderately loose," and "loose" for clear policy orientation expressions.
3. Expectation Management
The recent policy briefings and the associated stock market fluctuations have highlighted the importance of expectation management. If market expectations are overly inflated after a policy shift and ultimately unmet, it can dampen market sentiment and cause fluctuations. Whether through official or unofficial channels, experience needs to be continuously accumulated in managing market expectations.
4. Deflation Response
To address deflation issues, it is necessary to consider both the demand and supply sides. On the demand side, macroeconomic policies are crucial for promoting demand, and income policies can also be considered. For instance, when wanting to correct issues of excessively high incomes in certain industries, implementing "salary freezes" rather than "pay cuts" is more conducive to guiding market expectations. It is important to encourage the expectation that incomes will moderately increase year by year, enhancing consumer confidence and releasing excess savings. On the supply side, it is necessary to prevent redundant investment and encourage mergers and acquisitions to facilitate the exit of excess capacity.
5. Cultivating Internal Economic Dynamics
In line with the spirit of the Third Plenary Session, further leverage the decisive role of the market. After the promulgation of the Private Economy Promotion Law, it must be implemented without compromise to rebuild the investment confidence of private entrepreneurs. At the same time, further open up the service industry, treating domestic and foreign capital equally. Although China has overcapacity in many manufacturing industries, there is a lack of capacity in many service industries, offering significant room for development.
Leave a comment