Wen/opinion leader columnist Lu Ting
Recently, the "2022 Mid term Macro Summit - Stabilizing Growth and Achieving Path" held by the China Wealth Management 50 Forum (CWM50) was successfully held in Beijing. Against the background of the changes in domestic and international situations in the first half of this year, the Summit conducted in-depth discussions on the economic situation outlook in the second half of this year, the adjustment and optimization of macro policies, and the promotion of China's steady economic growth, with a view to providing decision-making reference for the research and judgment of China's macroeconomic situation and policy formulation in the second half of this year. Lu Ting, chief economist of Nomura Securities in China, attended the summit and delivered a speech at the summit forum of "Prospects for Capital Market Trends in the Second Half of the Year".
Lu Ting believes that China's economy will recover in the second half of the year, but the process may not be easy. Specifically, there are four risk factors in the recovery process: first, the possibility of re impact of the epidemic; second, weak confidence in the real estate industry led to a decrease in local fiscal revenue and overall demand; third, the global economic downturn led to a decrease in China's foreign demand. In addition, Lu Ting, based on the analysis of economic fundamentals, judged that in the second half of this year, the RMB may face depreciation pressure against the US dollar, and the stock market will rebound again after the impact. The risk of rising treasury bond interest rates will rise, and high-yield bonds will hardly improve.
From the economic fundamentals, I think the global economy in the second half of the year has the following characteristics:
First, the current global inflation may linger at the top for some time 。 Although the global energy prices, raw material prices and food prices have declined significantly recently, and even the inflation expectations of the American people have declined, risks still exist. The first risk is that the current situation in Russia and Ukraine is still complicated, and Russia may take some more radical measures on European natural gas supply. The second risk is that US rent, as a lagging variable, may continue to push up inflation. The third risk is that wages in developed countries are still rising. For example, the UK has just raised the wages of civil servants and public service practitioners by 5%. To sum up, the pressure of inflation cannot be underestimated.
Second, the interest rate increase in developed countries is a certainty, but there will also be great differences within developed countries 。 We believe that the interest rate increase in the United States will be relatively large. It is estimated that it may increase by 100 points in July, and finally reach the level of 3.75%. In Europe, the interest rate increase will be much smaller, and the scale reduction will be smaller and later.
So why is there such a difference? In the United States, the Federal Reserve has recognized the previous miscalculation, and the elite in the United States also have a demand to maintain the international reserve currency of the United States dollar. In addition, the interest rate increase will also promote the appreciation of the US dollar, which will not only help the United States ease inflation pressure, but also help the return of capital. Europe is different. Since the conflict between Russia and Ukraine is on their doorstep, and Europe is not as self-sufficient in energy as the United States, energy supply has become an important issue. In addition, the internal differentiation of Europe is also very serious. For example, recently, in Italy and other countries, the bond interest rate has risen rapidly, which is surprising. There is also some political turbulence. Therefore, this also leads to the internal reason of the ECB's forward thinking and backward thinking in policy. The policy objectives that the ECB actually wants to achieve are more diversified than those of the Federal Reserve, and many aspects are difficult to take into account.
Third, Europe, the United States and some other developed countries are very likely to enter recession from the third and fourth quarters of this year 。 The recession in the United States may be relatively shallow, while in Europe, affected by the conflict between Russia and Ukraine and the problem of energy supply, the recession may be earlier than that in the United States, and the recession range is uncertain.
Fourth, emerging market countries may face crisis 。 On the one hand, the gap in foreign exchange receipts and payments caused by the epidemic still has an impact on some emerging market countries so far; On the other hand, high inflation, rising food and energy prices and capital backflow caused by the Federal Reserve's interest rate hike have also caused serious political, social and economic problems in some countries, such as Sri Lanka.
Next, I would like to briefly introduce the characteristics of China compared with overseas economies. The first feature is that in the second quarter, China's economy grew only 0.4% year on year. Therefore, whether it is month on month growth or year on year growth, the approximate rate in the third and fourth quarters will be in a relatively rapid recovery process; Second, because China's domestic demand is still relatively weak, China's inflation is at a low level. Even if it rises in the second half of this year, the probability of CPI inflation exceeding 3% is not very high; Third, in terms of epidemic prevention policies, China is indeed very different from other countries. China has always attached great importance to epidemic prevention and control; Fourth, compared with Europe and the United States, China's monetary and fiscal policies are at a stage of easing and stimulus, and will continue to exert force.
Under such a background, the economy will recover, but the recovery process may not be smooth. Here, I will list four risks that will have an important impact on the volatility of China's economy and the volatility risk of China's main asset prices in the second half of the year:
First, the epidemic may hit again 。 Because of the strong transmission rate of the variant strains, and the rapid increase in the number of confirmed cases in the last two weeks, the impact of the new crown on the entire economy has appeared a cyclical state: when the prevention and control and closure efforts are strong, the number of cases will be significantly reduced, but after the unblocking, it may rise again. This will lead to corresponding fluctuations in the economy and asset prices.
Second, confidence in the real estate industry is weak. Now the confidence of the real estate industry is really weak, because the problem of housing delivery has entered a vicious circle to some extent.
Third, the local fiscal revenue sharply decreased 。 The local government's land sales revenue in June fell by 40% year on year, and the situation in the second half of the year may be worse than that in the first half of the year. This may not only affect the investment and consumption demand of the government, but also reduce the investment and consumption demand of residents due to the salary cut of civil servants and public institutions.
Fourth, the global economy has entered a downward phase. Many developed countries will enter the recession period, which will lead to the weakening of China's foreign demand. At the same time, the change of consumption structure in developed countries will also affect China's export trade.
Finally, based on the judgment of economic fundamentals, I would like to share some views on the capital market:
First, we believe that the US dollar is close to the top, but may not really reach the top 。 Due to various problems faced by the euro area, the depreciation of the euro against the dollar may not have reached the bottom, and the dollar index may still have a small increase.
Second, the interest rate of the US treasury bond may have peaked before, and the interest rate of the 10-year treasury bond may fluctuate around 3% in the future.
Third, bond interest rates in emerging markets have risen significantly, and currencies of some economies have depreciated significantly. In the coming months, this problem may become more serious.
Fourth, China's capital market has been affected by the epidemic with cyclical characteristics. Specifically, on the one hand, the RMB may face a certain degree of depreciation pressure against the US dollar in the future. On the one hand, the US dollar is really strong, and on the other hand, China's economy may show some fluctuations, especially if it is affected by the double impact of the epidemic and the real estate downturn; Second, the stock market has rebounded significantly in June. At present, it is in the downward adjustment period again. The downward reason is mainly due to the current impact of rising epidemic cases and problems in the real estate market, which may continue for some time. After the epidemic subsides and the government has introduced effective plans for real estate, the stock market will rebound again; Third, in terms of treasury bond interest rate, it may hover in the current position in the future, and the upward risk is slightly greater than the downward risk; Fourth, high-yield bonds, especially high-yield U.S. dollar bonds, have fallen sharply again in the past week or two, and private enterprises have basically lost their financing function in this regard. Therefore, the probability of improvement in the second half of the year is unlikely.
(About the author of this article: Nomura China Chief Economist)
