Domestic: Decoupling of Quantity and Price, Consumption Fails to Support Prices
This week, from a macro perspective, both domestically and internationally are at an important data disclosure juncture. Starting from April 10th (Wednesday), the U.S. CPI and China’s CPI, PPI, import and export, and financial data have been gradually disclosed. In the first half of the week, global capital markets remained relatively stable, awaiting the data disclosures. However, significant volatility emerged in the latter half of the week, summed up briefly: global capital markets are primarily pricing in continuously better-than-expected economic growth.
In China, the situation still remains a decoupling of quantity and price. This decoupling refers to a scenario where fixed asset investment and industrial value-added data are in an upward cycle, but prices of real estate, stocks, and consumer goods represented by CPI remain weak. Regarding the understanding of this decoupling, we tend to lean towards the notion that it stems from a significant contraction in household wealth due to issues in the real estate sector, leading to insufficient overall demand. Many in the market believe that China’s main problem is oversupply, which is a rather perplexing assessment. Is it because there are too many houses and too few people? Obviously not. The key issue lies in too many people being unable to afford houses. According to reports, only one-third of the registered population in the Shenzhen area own their own homes.
The main problem in China remains the prices, with the significant fluctuations in prices in the previous period leading to the current economic situation. A very obvious characteristic is that whenever Chinese real estate companies encounter difficulties, stocks related to real estate assets, real estate sales data, and real estate bond prices all experience significant declines. Even though real estate stock prices are already at low levels with relatively small fluctuations, the declines in real estate sales data and bond prices can reach around 20% to 50%. This data has a widespread impact on the economy. Peripheral financial institutions such as city investment companies, trusts, financial conglomerates, insurance, and shadow banking assets all face the risk of a run. From the perspective of household and business balance sheets, in the backdrop of a significant decline in the primary wealth storage method—real estate prices, it may be difficult for consumption to support the overall prices in China returning to stability. From a theoretical perspective, consumption depends not only on income but also on wealth levels.
When we realize that the decoupling of quantity and price is the main economic situation in China at present, the financial, import and export, and price data disclosed this week still reflect this situation without showing any significant turning points. Our expectation for the future is that the overall macroeconomic environment continues to move towards relaxation, but due to the global financial environment, short-term interest rates cannot be lowered, which remains a disadvantageous factor. Specifically, the short-term reverse repurchase rate of the central bank is 1.8%, and the ten-year treasury bond yield is 2.3%, leaving only a fluctuation range of 0.5 percentage points for the overall yield. Since the mention of concern about changes in long-term rates in the monetary policy committee meeting on April 3rd, the ten-year treasury bond yield has experienced some fluctuations, but according to the latest M2 data, the monetary supply from the banking side remains very ample. To prevent further declines in the ten-year treasury bond yield, the central bank may need to implement concrete bond supply measures and coordinate with the three major policy banks to provide long-term bonds.
Here are the specific data disclosed by China this week:
On April 12th, the central bank released the latest data showing that at the end of March 2024, the broad money supply (M2) balance was 304.80 trillion yuan, an increase of 8.3% year-on-year; the narrow money supply (M1) balance was 68.58 trillion yuan, an increase of 1.1% year-on-year. New social financing was 4.87 trillion yuan, an increase of 514.2 billion yuan less than the same period last year; the year-on-year growth rate of social financing stock was 8.7%, down 0.3 percentage points from the previous month. In terms of imports and exports, in US dollar terms, the total value of imports and exports in March was $500.81 billion, a year-on-year decrease of 5.1%. Among them, exports were $279.68 billion, a year-on-year decrease of 7.5%; imports were $221.13 billion, a year-on-year decrease of 1.9%; and the trade surplus was $58.55 billion. Looking at the first quarter, the total value of China’s goods trade imports and exports was $1.43 trillion, a year-on-year increase of 1.5%. Among them, exports were $807.5 billion, a year-on-year increase of 1.5%; imports were $623.84 billion, a year-on-year increase of 1.5%. In March, the national consumer price index (CPI) rose by 0.1% year-on-year, and fell by 1.0% month-on-month. On average for January to March, the CPI remained unchanged from the same period last year. The national producer price index (PPI) fell by 0.1% month-on-month, narrowing by 0.1 percentage points from the previous month’s 0.2% decline; it fell by 2.8% year-on-year, slightly expanding the decline.
The decline in import and export data far exceeded everyone’s expectations, and since it was announced after the Friday closing, its impact on assets may appear in the following week. Faced with such a situation, from a macroeconomic perspective, efforts are continuously made to stimulate quantity, but there may be some limitations regarding prices. In terms of quantity, the latest policies promoting equipment upgrades and trade-in policies are gradually being implemented, supporting the rise in asset prices of machinery, home appliances, and other categories, including companies like LiuGong, Sany Heavy Industry, Haier, and Gree.
The stimulating effect on quantity is undoubtedly a kind of pulse-like presence. Whether the width and height of this pulse can be maintained for a quarter and effectively support China through the phase where the Federal Reserve finds it difficult to lower interest rates is a crucial factor. The evolution of prices within the economy from stagnation to stagflation, although not our standard forecast scenario, should also be a focus of attention for risk factors. Simply put, the premium level of investment tools pegged to global assets within China, such as gold, Nikkei, and Nasdaq ETFs, may rise further if expectations of stagflation increase. Just to clarify, what we mean by stagflation mainly refers to the relative decline in the value of the Renminbi.
Overseas: Economic Growth Acts as a "Stabilizing Force" for Asset Prices
Internationally, the pricing logic remains unchanged. In short, strong economic growth translates to robust asset prices. This Wednesday, the United States announced a CPI of 3.5% for March, a 0.3 percentage point increase from February. Despite the short-term volatility experienced by global capital markets that night in response to this data, the pricing logic has remained unchanged. The two-year and ten-year Treasury bond yields in the United States remained strong, and the US dollar index climbed to 105. These two data points essentially represent that global financial market liquidity is in a relatively tight phase. However, traders are still bullish on crude oil and gold, indicating continued optimism about economic growth.
To elaborate, if the overall CPI data in the United States remains above 3%, with the core CPI remaining around 4%, and maintains such levels for a prolonged period, the overall monetary level and purchasing power of the economy will continue to expand. In such an environment, investing in scarce assets is a very wise choice. The continuous rise in real estate prices in the United States, in addition to basic supply and demand support, is also significantly influenced by long-term optimism about economic growth, as real estate is a typical scarce asset.
We can compare the situation of major stock asset price increases globally, where there has been a considerable degree of differentiation among Europe, Japan, and the United States, mainly due to diverging expectations regarding monetary policy. Expectations for a rate cut in Europe in June have gradually strengthened, while expectations for further rate hikes in Japan are increasing. Meanwhile, expectations for the first rate cut by the Federal Reserve this year are continuously being pushed back. The key supporting factor for these stock indices is economic growth data. For Japan, if economic data is ideal, there is still some room for the Nikkei index to yield returns.
