Wen/opinion leader columnist Lu Ting
Just half way through this year, China's economy has just experienced a round of sharp fluctuations, global inflation is high, the Federal Reserve ECB and many other central banks have begun to raise interest rates significantly, and the risk of global recession has increased, so now is a very good time to discuss China's macro-economy.
With regard to the outlook of China's economy in the second half of the year, there has been a heated debate in economics recently. It is said that the inflection point has passed and will continue to improve in the second half of the year; More optimistic, they have even begun to worry about the risk of overheating due to the recent introduction of many loose stimulus policies, which may cause a superposition effect. Personally, I prefer to be cautious. As for the economy in the second half of the year, I would like to observe from three points: first, I believe that the economy has indeed shown signs of recovery and rebound since the beginning of June. Secondly, the foundation of economic recovery is not solid, the epidemic is not over, and all kinds of risks still exist. Growth may still fluctuate greatly in the second half of the year. Finally, in terms of policy, there is not the risk of excessive stimulus, but there are problems such as insufficient stimulus, inadequate stimulus methods, and untimely risk response. Real estate may spiral downward with other sectors, and we cannot take it lightly.
First of all, since the beginning of June, we can clearly see that the economic recovery is obvious from the aspects of aviation, film box office, catering, retail, logistics, export, power and industrial added value. Real estate sales also rebounded, with a year-on-year decline of 18% in June, which is no less than a year-on-year decline of 32% in May. There are two main reasons for the recovery. One is that the epidemic has been effectively controlled, including Shanghai and many other cities that have been unsealed since the beginning of June; Second, the policy of loose stimulus, especially the policy of halving the tax on car purchase, has an immediate effect on car sales. The sales volume of passenger cars fell by 17% in May on a year-on-year basis. The sales volume surged in June, up 23% on a year-on-year basis. It is expected to grow by 18% in July. In the second half of this year, I estimated that the halving of the auto purchase tax would boost auto sales and production by 15-20 percentage points, with a driving effect on GDP of about 0.7 percentage points.
The second point is that we should not be blindly optimistic about the economic prospects. Here I mainly talk about four risks. First of all, COVID-19 is still present, and the epidemic situation has worsened globally in the past three weeks. Since the end of June, the number of confirmed and asymptomatic cases in mainland China has risen from less than 40 to nearly 1000; Macao has been in the semi enclosed city since a week ago; In Hong Kong, the number of new cases has recently risen to about 4000 per day. Globally, over the past two months, the daily average number of cases has increased from 300000 to more than one million. Because the country has abandoned large-scale testing, the actual number of infected people may be far higher than this figure. Compared with the initial COVID-19 in early 2020, the virulence of COVID-19 variants in the first half of this year is lower, but the transmission is stronger, epidemic prevention is more difficult, and the cost of clearing is higher and higher. At the same time, because most countries have chosen to "coexist with viruses" and have greatly liberalized, it objectively increases the difficulty of zeroing in China. However, the new variant BA. 5 of Omikron, which was popular in the recent month, has increased its communication power compared with the variant popular in Shanghai in March and April, further increasing the difficulty of zeroing in China.
In addition, from the perspective of epidemic duration, this year is the third year of epidemic resistance. With the continuation of the epidemic, enterprises, residents and the government are consuming more resources, feeling more tired and expecting more instability, which will affect the consumption and investment of durable goods for families and enterprises.
Two months ago, I put forward the concept of "New Crown Business Cycle". In my opinion, China has, to some extent, faced the problem of business cycle caused by the fluctuation of epidemic situation. In this cycle, when the number of cases increases, the intensity of city closure and full staff detection will increase, and consumption, investment and even exports will be affected, and the macro-economy will weaken. When the closure of the city is strengthened, the government's policy to stimulate the economy will also be strengthened because of the increased risk of economic downturn. At a certain time, the government controlled the epidemic through powerful means. The cities that had been closed before began to unseal. The stimulus policies also began to play a role, and the economy rebounded from the bottom. However, with the opening of the city, the frequency of nucleic acid detection will decrease, the flow of people will return, and the retaliatory consumption will gather. The number of new coronavirus cases may rise again, the epidemic prevention efforts will be forced to upgrade, and the economy will cool down again, or even shrink again. In my opinion, before the end of this year, China's economy may have a large fluctuation in the recovery due to the epidemic. The fluctuation is due to the spread of the virus and the evolution of the government's epidemic prevention strategy, so the recovery may not be very smooth.
The second risk is that export growth may continue to decline. There are several factors behind it. First, it has a high base, and its exports have grown rapidly in the past two years; Second, from the perspective of foreign consumption structure, as more and more countries choose to coexist with viruses, the economy is back on track, and the focus of consumption is shifted from durable goods and physical goods to service consumption, which will also reduce the demand for our products. Third, global economic growth outside China may begin to decline sharply in the second half of the year due to high inflation, the situation in Russia and Ukraine, policy tightening and other reasons. We predict that the developed American economy may enter recession from the fourth quarter of this year, and the European economy may enter recession from the third quarter of this year. In addition to the United States and Europe, a number of other developed countries, such as Japan, South Korea and Australia, may also enter recession, so China's foreign demand is facing a grim situation.
After talking about epidemic and export, let's talk about the third risk - real estate. The real estate and its upstream and downstream industrial chains contribute 1/4 of China's GDP, which has a huge impact. In the past 20 years, whenever the government needs to stimulate demand in the face of economic downturn, it has always been the most important tool to relax the control on real estate and stimulate the demand for housing investment. Without a clear understanding of the real estate trend, it is difficult to truly grasp the trend of China's economy in the future. The current situation of the real estate industry is very serious. Although the sales in June improved, the high-frequency data in July showed that the sales turned down again. Even in June, the data of new construction, completion and land purchase worsened. Among them, the newly started construction decreased by 45% year on year, the completed construction decreased by 41%, the land sales decreased by 53% by area, and by 65% by value.
Now it seems that the prospects for the recovery of the real estate market in the second half of this year are not optimistic. The recent wave of supply cuts will have three negative effects. First, it aggravates residents' concerns about the failure of real estate enterprises to fulfill their housing delivery commitments, and worsens the already formed vicious circle, that is, residents are afraid to buy a house because they are worried about the problem of housing delivery, The sharp drop in new house sales further led to developers' cash flow constraints and inability to build houses. The second is to force the local government to further tighten the management policy of pre-sale funds. It is rational for a single local government to do so, but it may not be rational from the perspective of the group, resulting in the fact that the local government is in a prisoner's dilemma, further worsening the cash flow of real estate enterprises. Third, the real estate enterprises now have no funds to buy land, causing the land price to fall, which in turn leads to the expected decline in house prices and affects the sales of new houses; Local governments are forced to cut salaries for civil servants and public institutions because of the sharp drop in land sales. This group is one of the main force in many small and medium-sized cities to buy houses, which will also lead to a decline in new house sales.
In addition, there are several reasons why the real estate industry may continue to deteriorate: first, because the epidemic is still uncertain, the unemployment rate is high, especially for young people, and many people dare not make up their minds to buy houses with loans. Second, although the real estate regulation has been relaxed to a large extent at the local level, there is little room for relaxation at the central level. Third, from 2015 to 2018, the monetized shed reform has put a large amount of real estate demand in front of the third, fourth and fifth tier, reducing the effect of this round of loose real estate stimulus policies. In my opinion, it is not easy to break these vicious cycles. The real estate industry cannot recover easily in the second half of the year. The top priority is to ensure the delivery of houses and restore the confidence of buyers.
The fourth risk, and the last one I emphasize today, is that this year's fiscal revenue gap is very large, and the pressure to ensure fiscal expenditure is relatively heavy. Judging from the annual budget expenditure set by the "two sessions" this year, the intensity is very strong. However, the problem is that when preparing the budget, we overestimated the revenue within the budget, and also significantly overestimated the revenue of government funds, which are mainly land sales revenue and are off budget. In a broad range of estimates, I estimate that the gap is about 6 trillion yuan, and the budget gap caused by the economic downturn is about 2.5 trillion yuan; Moreover, due to the massive reduction of land purchase by real estate enterprises, the revenue from land sales by local governments may decline by 40% to 50% this year. This year, the revenue from land sales by local governments is conservatively estimated to be 3.5 trillion less than last year. If the land purchase funds of local government platforms are deducted, the actual revenue will be more than 4 trillion less. Many analysts believe that the local government's net land income should be used to calculate the fiscal gap, which will be much smaller. This is not unreasonable, but I still think this calculation method seriously underestimates the government's financial gap and the impact on the actual government expenditure level. This is because many expenses related to land expenditure, such as demolition compensation and three supplies and one equality, are actually important government expenditures, which also promote many demands and cannot be ignored. This year's huge fiscal gap, if not effectively and timely filled, will seriously affect the expenditure of local governments in all aspects. In fact, many places have been forced to reduce the salaries and bonuses of civil servants and institutions.
The last aspect I want to talk about today is the policy. In the second half of the year, there is no problem of excessive stimulus, but there may be problems of insufficient stimulus and untimely risk response and disposal.
At present, the space and effect of traditional monetary policy are limited. There is little room for interest rate reduction. There are two main reasons. First, major economies are basically raising interest rates by a large margin, and the interest margin at home and abroad has widened, leading to capital outflows. At present, the monthly outflow in the bond market is nearly 100 billion yuan. Second, the deposit interest rate is already very low, and there is no room to reduce it. The so-called interest rate reduction is to reduce the loan interest rate. In order to ensure the bank's profits, the space for interest rate reduction is also very small. There is also little room for reducing the reserve ratio. There are also large banks, and the reserve ratio of small banks is close to the lower limit. The effect of interest rate and reserve ratio cuts is also limited. At present, China's macro problem is not that the funds are too expensive and the loanable funds are not enough. The second problem is that the effective credit demand is not enough. In fact, the market interest rate is falling, D R007 Yesterday, it was only 1.48%. The interest rate of 10-year treasury bonds was lower than 2.8%, lower than the one-year MLF rate of 2.85%, which indicates that the effective credit demand is weak.
Therefore, the policy burden in the second half of the year is in the financial aspect, but the financial power is restricted by three aspects. First, as I said before, the gap is too big. In the past, many measures, including increasing the credit line of policy banks and other policies, were actually to fill this gap. Although many scholars and insiders call for issuing special national debt or directly increasing the deficit rate, these measures need to follow the legal procedures of the National People's Congress, which is difficult. In the past two months, the loan line of policy banks has increased by 1100 billion. The gap in the second half of the year may be mainly made up by policy financial institutions, so the space and strength may be limited. From the perspective of policy recommendations, I am very much in favor of directly increasing the deficit ratio this year, so as to increase the issuance of national bonds and local government bonds.
Second, due to the epidemic, the effect of the fiscal stimulus policy will be discounted. This is due to the rapid rise of epidemic prevention expenditure, which used up funds that could have been used in many other fields. The spillover effect of epidemic prevention expenditure may not be as big as other types of financial expenditure in some aspects, which is difficult to drive consumption and investment in other fields. In addition, when the epidemic broke out in some places, the progress of many projects was also affected due to measures such as city closure, and frequent full staff testing actually affected the transportation of raw materials and the progress of the project.
Third, this year's special debt has been issued. Last year, more than 100 billion yuan remained. The quota for next year will be issued in advance in the fourth quarter of this year. This is indeed a big effort, which is conducive to the local government to promote infrastructure projects. However, the special debt fund cannot be used for general expenditure, and its use direction is subject to many restrictions. In the context of the rapid contraction of the real estate industry, many local governments are short of funds. The limited funds must first be put into maintaining the basic operation of the government and epidemic prevention. Therefore, the willingness and ability to provide supporting funds to invest in infrastructure on a large scale are affected.
In addition to fiscal policy, there is another key policy in the second half of this year, which is how to deal with the dilemma of real estate. As mentioned earlier, the monetized shed reform in 2015-18 brought a lot of demand ahead; The sequelae of this policy are too big to be reused in the current environment, especially in small and medium-sized cities. However, in China's major cities, there is an obvious bottleneck in land supply. Once the demand side stimulus is excessive, it is easy to lead to a retaliatory rise in house prices, which occurred in 2015 and 2016. In terms of housing guarantee and delivery, the current problem is too big and involves too many aspects. If the policy is not designed properly, it is likely to lead to large-scale moral hazard. Once the government releases the policy of housing guarantee and delivery with great efforts, more housing enterprises may shut down and the local government may accelerate the withdrawal of pre-sale funds for a period of time.
Finally, let's summarize. The economy is already recovering, and a sustained recovery is expected in the second half of the year, but the risks should not be underestimated. There is no need to worry about overheating of the economy or excessive policy stimulus. The key to the policy in the second half of the year is to minimize the cost of epidemic prevention and give a clear exit expectation as far as possible, which is conducive to investment and durable goods consumption. In terms of fiscal policy, in addition to accelerating the construction of the projects already scheduled and started, we should try to make up for this year's financial gap, guarantee and even increase general expenditure, ensure the basic operation of local governments, and ensure basic people's lives and market entities through appropriate financial and financial support. In terms of real estate, the top priority is to guarantee the delivery of houses. Although the introduction of any policy in this regard may lead to some moral hazard, we should properly handle the problem of housing guarantee and delivery through better policy design. If necessary, we can consider setting up a central special fund. The specific implementation is coordinated by the provincial government. On the basis of classifying real estate enterprises, different methods should be taken for different real estate enterprise projects. Finally, in large cities with population inflow, it is better to increase land supply on the one hand, and further loosen the real estate policies of these cities on the other hand, so as to really make the real estate industry in China soft landing.
(About the author of this article: Nomura China Chief Economist)
