As of March 6th, the current macroeconomic situation remains consistent with the expectations from December 2022: at a global level, stagflation risks have significantly increased, geopolitics has not improved, and demand continues to decline. Domestically and abroad, demand has not shown significant improvement, and the pressure on the macroeconomy from the real estate sector remains unchanged, putting pressure on the 2023 growth target of around 5%.
Globally, stagflation risks have significantly increased.
In January, the US CPI recorded 6.4% and PPI recorded 6%, far below market expectations. Subsequently, financial institutions led by Nomura Securities quickly called for a 50 basis point rate hike, causing the US dollar index to quickly climb to its current high of 104.5, while the yuan exchange rate responded by falling. Meanwhile, the US labor market continues to maintain a high heat state, with 517,000 new non-farm jobs added in January, reaching a new high, but with rapid structural adjustments: leading technology companies are carrying out large-scale layoffs, while the service industry dominated by catering and tourism is rapidly expanding, forming an overall expansion trend in the labor market. From the perspective of the Wall Street Journal, there are two main factors: 1. After the epidemic, many companies still continue the “work from home” policy, causing residents to turn to local consumption and significantly increase household travel density. 2. The wealth accumulation caused by previous quantitative easing still has momentum; although recent MasterCard data shows that the credit card delinquency rate of young people is rising, the consumption power of the entire American resident sector is expected to continue for several months.
Since 2023, although global commodity prices have declined, they still remain at high levels. Although global central banks have continued to raise interest rates since 2022, coupled with high and sustained prices continuing to suppress demand on the consumer side, due to geopolitical influences, energy and food prices remain strong. The core reasons come from the price control and policy constraints of the major energy exporting countries (Russia and OPEC), as well as the continuous damage to production capacity in major fertilizer and food-producing areas (such as Ukraine). From the current global situation, macroeconomic regulation is powerless to solve inflation pressures. The main method of solving the problem of high inflation is still to use rate hikes to suppress demand, to trade demand decline for inflation relief.
In January 2023, the US PMI recorded 47.7, in the contraction zone. According to a survey of US economists in January, the vast majority of economists predicted that the growth rate of US GDP in the second quarter would be between -2% to 0%. With the pressure from slowing inflation, the pressure of global economic stagflation continues to climb.
Domestically: In the face of high winds and waves, stability is sought in pursuit of progress.
In 2022, although the central government tried to turn the tide through measures such as reducing fees and taxes, the national economy remained sluggish under the pressure of the pandemic. The GDP growth rate for the whole year was recorded at 3%, with the fastest growth rate in the primary industry at 4.1%. The unemployment rate, especially the youth unemployment rate, remained high, and corporate profits continued to decline. According to the “2022 National Economic and Social Development Statistical Bulletin” of the People’s Republic of China, profits of state-owned holding enterprises increased by 3.0% to 2.3792 trillion yuan compared to the previous year, while profits of joint-stock enterprises decreased by 2.7% to 6.1611 trillion yuan, profits of foreign, Hong Kong, Macao and Taiwan-funded enterprises decreased by 9.5% to 2.0040 trillion yuan, and profits of private enterprises decreased by 7.2% to 2.6638 trillion yuan.
Compared with 2022, the stimulus in 2023 will be lacking by 3-4 trillion yuan. From the current macroeconomic environment, unless a special government bond is issued or the deficit rate is increased, monetary stimulus will not be as strong as last year. In comparison between 2022 and 2023, the epidemic that hindered macroeconomic development in 2022 has been basically eliminated, while 2023 will face the obstacles of increased overseas uncertainty, global demand downturn, obvious slowdown in domestic demand, and the continued existence of real estate problems.
Since 2022, overseas uncertainty has continued to rise, and high inflation is difficult to control. Regardless of whether it is a “soft landing” or a “hard landing,” the global macro-economy will enter a recession stage, with demand rapidly weakening under the background of gradually shrinking quantitative easing in the early stage. The rapidly weakening demand pressure will quickly spread to China’s manufacturing industry. Since the end of 2022, affected by the high base number of the previous year and weak demand from Europe and the United States, China’s export growth rate has turned negative. Although the new export orders of the PMI in February 2023 are in the expansion zone, considering the base number from the previous month and the large number of empty containers in major domestic ports such as Ningbo Port, as well as the 16.3% month-on-month decline in the China Containerized Freight Index (CCFI), it will be difficult for the export growth rate to continue in the first half of the year. Overall, export trade will be difficult to sustain in 2023.
The insufficient external demand has led to a lack of driving force in exports, and the actual operating rate of the manufacturing industry may decline in 2023. When discussing the macro economy in 2023, it is necessary to pay special attention to the M2 growth rate and social financing growth rate. In January 2023, according to the “January 2023 Financial Statistics Report” data, the balance of broad money (M2) was RMB 27.381 trillion, a year-on-year increase of 12.6%, of which RMB deposits increased by RMB 6.87 trillion in January, an increase of RMB 3.05 trillion year-on-year. Among them, household deposits increased by RMB 6.2 trillion, non-financial enterprise deposits decreased by RMB 715.5 billion, fiscal deposits increased by RMB 682.8 billion, and non-bank financial institutions deposits increased by RMB 1.01 trillion. The continuous increase in the amount of household deposits means that the willingness of residents to consume is still weak, mainly because of weak expectations. The incremental scale of social financing reached RMB 5.98 trillion, which was RMB 195.9 billion less than the same period last year, reflecting that the willingness of supply-side expansion is also in a weak position. From the perspective of economic recovery, supply should be driven by demand. According to calculations, consumption should achieve a growth rate of 8% in 2023 in order to achieve the annual target. Stimulating residents to release consumption demand should be a key policy focus in 2023.
Since the real estate credit default events in mid-2022, real estate has become the biggest obstacle to China’s economic recovery. Starting from the third quarter of 2022, “baojiao lou” (referring to real estate developers defaulting on their payments to suppliers) has become a focus of government work. From an economic perspective, the impact of real estate credit defaults on the national economy is not only reflected in credit crises similar to Japan and the United States, but also in the local fiscal and credit systems in China, where the role of real estate is crucial. Firstly, the future local finance will no longer be able to rely on land sales to support growth, so local economic growth must turn to an endogenous growth model focusing on high-quality development. Secondly, as the underlying collateral for credit, once real estate prices fluctuate, new credit risks will continue to expand, which will suppress the financing demand in the national economy. In 2023, the foundation for the recovery of the national economy is still to stabilize the real estate market, and the core of stabilizing the real estate market lies in whether the expectations of the household sector can promote funds to continue to flow into real estate. From the current situation, stabilizing prices and reducing inventory are the key factors. For real estate companies, the balance sheet will continue to shrink.
Downstream enterprise profits continue to shrink, and expansion expectations are difficult to lift. In January, the year-on-year growth rate of the producer price index (PPI) recorded -0.8%, mainly due to the high base last year. Looking at the global commodity market, prices for major commodities such as crude oil, iron ore, and natural gas remain high. As the world’s major commodity importing country, China is forced to accept the pressure of imported inflation, which has led to the continuous shrinkage of downstream manufacturing enterprise profits. Coupled with the risk of declining domestic and foreign demand, enterprise expansion and borrowing willingness will remain low. If bulk prices continue to maintain high volatility in 2023, corporate financial data will continue to fall short of expectations.
In terms of currency stability, domestic inflation is still mainly driven by imports. The current inflation risks lie in energy and food, and only by stabilizing these two factors is it possible to maintain the inflation target. According to the data from the “2022 Statistical Bulletin of the National Economy and Social Development of the People’s Republic of China”, the total area of grain cultivation in the year was 118.33 million hectares, an increase of 700,000 hectares from the previous year, and the total grain output was 686.53 million tons, an increase of 3.68 million tons from the previous year, an increase of 0.5%. Grain security has been increasing year by year, and domestic grain prices have been decreasing year by year due to fluctuations in import prices. Secondly, domestic consumer demand remains weak, and it is difficult for the demand side to support a rapid increase in inflation. The low inflation data last year was not due to poor transmission, but rather because overall demand shrank and high prices did not reflect. This has laid the foundation for stimulating policies in 2023, which means that a quantitative monetary policy will not trigger large-scale inflation. At the same time, if inflation rises moderately, from the perspective of non-neutral monetary policy, if stimulus measures can promote economic growth faster than inflation rises, then the exchange rate of the RMB can be stabilized.
Asset Prices: Stuck in Volatility
In the context of stagflation, commodities are unlikely to experience a bear market, and there is limited room for growth in the stock market. The bond market is also unlikely to experience growth beyond expectations.
Since the end of 2022, the continuous strengthening of the US dollar index has caused the renminbi exchange rate to continue to decline, leading to a significant retreat in renminbi asset prices at the end of the year. Currently, the US dollar index is still at a high level of 104, and the market expects a 50 basis point increase, which is expected to push it higher, continuing to increase the pressure on renminbi asset prices.
Looking back to the fourth quarter of 2022, the continuous impact of the epidemic and the rapid rise of the US dollar index caused global investors’ expected return on investment in renminbi assets to weaken quickly. Entering 2023, with the rapid clearance of epidemic risks, the challenges faced by renminbi assets will gradually decrease. Next, whether macro policies can boost national economic expectations will be the key to the upward trend of the capital market. If economic growth momentum is good, asset returns should be higher than exchange losses, and we believe that global investors will continue to invest in renminbi assets. The key issue now is the US dollar index. If the US dollar continues to strengthen, it will force global investors to turn around and stop going long. The second issue is inflation pressure. If global commodity prices continue to fluctuate at high levels, downstream companies’ profits will be difficult to provide good returns to investors, forcing them to switch targets.