Under the downward pressure of the economy, fiscal efforts will benefit infrastructure investment
On July 9, the People's Bank of China lowered the deposit reserve ratio of financial institutions by 0.5 percentage points. On July 30, the Politburo meeting set the tone that "the domestic economic recovery is still unstable and uneven."
The Politburo meeting called for a proactive fiscal policy to enhance policy effectiveness, secure the bottom line of the "three guarantees" at the grassroots level, reasonably grasp the progress of budgetary investment and local government bond issuance, and promote the formation of physical workloads at the end of this year and early next year.
A prudent monetary policy must maintain reasonable and sufficient liquidity to help small and medium-sized enterprises and difficult industries continue to recover.
Judging from the statement of the Political Bureau of the Central Committee and the decline of China’s PMI for four consecutive months, the decline in China’s economic growth in the second half of the year has basically become a consensus. The market’s expectations of accelerating fiscal expenditures and infrastructure underpinning the economy have increased. Investors should pay attention to defenses in investment responses. .
Downward pressure on the domestic economy
In July, China Mining PMI fell to 50.40%, which was down for four consecutive months, and Caixin China PMI fell to 50.30%, which was down for two consecutive months.
The downward pressure on China's economy mainly comes from pressure on real estate, as well as expectations of a decline in exports and sluggish consumption.
Since 2021, policies have continued to strictly control housing speculation and continue to cool down real estate.
On July 30, the Politburo meeting continued to emphasize "We must adhere to the positioning of houses for living, not for speculation, stabilize land prices, house prices, and expectations, and promote the steady and healthy development of the real estate market. Accelerate the development of rental housing and implement land use , Taxation and other supporting policies".
Since 2021, the central government has emphasized the setting of "housing and housing, not speculation". Recently, the supervision of the real estate market has been tightened again. At the beginning of August, the Ministry of Housing and Urban-Rural Development has interviewed or supervised nearly 20 cities, only on August 5th. , Hangzhou, Beijing, and Chengdu have introduced new regulations for real estate regulation.
Local regulatory measures are still being introduced intensively, constantly "patching" and "blocking loopholes."
From the "three red lines" to "no speculation in housing", the constant introduction of regulatory measures continue to deter those speculators who still have illusions about the excessively rapid rise in housing prices, and at the same time lead to a decline in the growth rate of real estate investment.
In June, the investment in real estate development was 1.79 trillion yuan, a year-on-year growth rate of 5.9%, a decline for three consecutive months.
The slowdown in real estate investment growth is mainly due to the slowdown in land acquisition by real estate companies, which may lead to subsequent real estate start-ups and lower construction speeds.
Under the background of strict real estate control, the room for residents to increase leverage has weakened. Since May, the growth rate of residents’ medium- and long-term loans has also begun to decline. Significant decline.
Real estate investment has promoted the rapid development of China’s economy in the past 20 years. However, this development model is facing high debt pressure. While promoting China’s urbanization, it has also harmed residents’ other consumption abilities. At the same time, it has caused the economic structure to deviate from consumption and manufacturing. Sustainable economic development brings difficulties.
The Chinese leadership’s awareness of real estate cooling has started in 2017. In 2020, facing the global monetary easing, housing prices will continue to rise, and the restrictions on the real estate industry will gradually become stricter. For the Chinese economy, which is heavily dependent on the real estate industry, it will bring about economic growth. Increase short-term pressure.
In addition, as the consumption of durable goods in the United States and Europe peaked and the United States and Europe returned to their own production capacity, the Fed gradually opened Taper (cutting debt purchases), and China’s export growth rate in the second half of the year has also become a consensus.
In terms of consumption, the current unemployment rate is still high, the income level of residents, and the strict blockade in some areas due to the new wave of new crown epidemics have put pressure on consumption growth.
In June, the urban surveyed unemployment rate was 5.0%, and the urban surveyed unemployment rate of 31 major cities was 5.2%, which is still higher than the same period in 2018~2019; at the same time, the number of new urban jobs in June was 1.24 million, lower than 2017~2019 In the same period; the current income perception index surveyed by the central bank in June was 51.20%, which was lower than the same period in 2017~2019.
Weak employment and income have affected the recovery of consumption.
In fact, domestic consumption in June was 3.76 trillion yuan, a two-year average year-on-year growth rate of 5.47%. This consumption growth rate was lower than the level of around 7% before the epidemic.
In terms of sales of automobiles, furniture, clothing, air conditioners, refrigerators, and washing machines, overall sales are weak.
In addition, the rise of the domestic epidemic in August and the cancellation of a large number of flights will also affect the recovery of domestic consumption.
In the second half of the year, in addition to optimistic investment in manufacturing, real estate, exports and consumption are all facing certain pressures, making domestic economic growth not optimistic.
Fiscal force may be good for infrastructure investment
In the first half of 2021, China's fiscal and monetary policies are conservative. The main reason is that the strong recovery of overseas demand has driven China's exports to support economic growth. In the second half of the year, under the downward pressure of the economy, domestic fiscal and monetary policies will be further strengthened.
In terms of monetary policy in the first half of the year, the year-on-year growth rate of social financing and M2 continued to decline. Monetary policy showed the characteristics of "wide currency and tight credit". It has maintained a downward trend since November.
In terms of finances, bond issuance and fiscal expenditures were conservative in the first half of the year, and there is more room for fiscal policy in the second half of the year.
In 2021, the national debt limit is 2.75 trillion yuan, the local government general debt limit is 0.8 trillion yuan, and the special debt limit is 3.65 trillion yuan. The total of the three is about 7.22 trillion yuan. From January to July, the total issuance of national debt and government bonds is 2.71 trillion yuan. Yuan, the issuance progress is 38%, and there is still a lot of room for fiscal force in the second half of the year.
With the tightening of real estate policies, bank loans will face a certain asset shortage in the second half of the year, which may lead to uncertain economic recovery.
How to solve the problem of bank credit sinking?
How to better support the manufacturing industry?
Fiscal efforts may be able to solve the problem of bank funds overflowing and credit sinking to a certain extent.
Fiscal accelerated bond issuance can become the initial capital for project investment, and after the formation of projects and workloads, it can further stimulate bank credit investment and form a cycle in which the fiscal cycle drives the credit cycle.
Observing the progress of fiscal bond issuance and expenditures in the second half of the year is the key to observing fiscal underpinnings and economic growth.
Fiscal debt issuance and expenditure are more invested in infrastructure projects, forming a physical workload, which will bring opportunities for infrastructure investment.
How to observe the start of infrastructure
The infrastructure investment we often talk about mainly includes urban road transportation, municipal public facilities, power and heat investment, flooding projects, etc. In the past two years, new infrastructure investment has been emphasized, mainly including information infrastructure (5G, industrial Internet, artificial intelligence), and innovation foundation Facilities, etc., the recent rise of industrial parks in various regions are also part of infrastructure investment.
Because of the long investment cycle and relatively low return on infrastructure construction, government-led investment is often led by the government, and it has also become the main means for the government to reversely regulate the economy and underpin the economic downturn.
The growth of infrastructure investment mainly depends on the government's willingness (project approval and project approval status), funding sources, and project construction progress.
The government's wishes are mainly related to the fiscal cycle and the government deficit target-the central deficit in 2021 is 2.75 trillion yuan, the local general debt is 0.8 trillion yuan, and the local special debt is 3.65 trillion yuan, a total of 7.2 trillion yuan. The government's will set the tone for infrastructure. Part of the funding source of the project.
Land transfers, special bonds, urban investment bonds, and bank loans are the main sources of funding for infrastructure projects. Generally, we can track the sources of funding to know whether the infrastructure projects are expected to be good or not.
The most intuitive way to observe the situation of infrastructure is the actual project and the sales of construction machinery including excavators. The progress of infrastructure project construction and the formation of physical workload are the keys to infrastructure to promote employment and economic development.
At present, infrastructure investment is expected to form a small wave of upsurge in September to October.
On the one hand, the July 30 Politburo meeting emphasized the formation of physical workloads at the end of 2021 and early 2022, and the third quarter is the most convenient season for project construction; on the other hand, the special debt of local governments currently seems to have more room for development.
Local government debt issuance, large-scale infrastructure construction company orders, and construction machinery sales data are important references for observing infrastructure investment.
From January to July, local governments added 1.35 trillion yuan in special bonds, and the issuance progress was 37%. It is expected that the issuance of local government special bonds will be accelerated in August, and the sales of trucks and excavators will verify the progress of infrastructure projects.
From the perspective of construction machinery sales, overseas excavator demand is strong, and domestic crane and forklift sales are strong.
In June, the sales of excavators from major domestic enterprises were 23,100 units, a year-on-year decrease of 6.2%, of which domestic sales were 16,965 units, a year-on-year decrease of 21.9%; exports were 6,135 units, a year-on-year increase of 111.5%.
With regard to the utilization rate of excavators, the start-up time in June 2021 was 106.2 hours, which continued to decline like PMI.
Sales of other construction machinery have a relatively high level of prosperity. In June 2021, the sales of major companies' bulldozers were 456, a year-on-year decrease of 8.1%, the sales of cranes were 6,056, a year-on-year increase of 11%, and the sales of forklifts were 102,690, a year-on-year increase of 42%.
From the perspective of large-scale enterprise orders, China State Construction's new contract value from May to June performed strongly, and China Railway Construction, China Communications Construction, and China Railway Construction also performed well.
In June, the cumulative value of newly signed contracts of China Construction was 1.82 trillion yuan, a cumulative year-on-year increase of 37.39%; the cumulative value of China Railway Construction’s newly signed contracts was 1.05 trillion yuan, a cumulative year-on-year increase of 20.40%; the cumulative value of newly signed contracts by China Communications Construction was 0.69 million Billion yuan, a cumulative year-on-year increase of 28.5%; the cumulative value of China Railway’s newly signed contracts was 1.03 trillion yuan, a cumulative year-on-year increase of 18.8%.
What investment opportunities will infrastructure bring
In terms of medium and long-term trends, China’s urbanization advancement, the enhancement of China’s manufacturing global competitiveness, and China’s “One Belt, One Road” expansion, there is still room for China’s infrastructure growth from these perspectives.
China's urbanization rate in 2019 is 61%, which is still more than 10 years behind the urbanization level of Japan and the United States. Urbanization will boost infrastructure demand.
In addition, compared with economies such as the United States, Japan, Germany, the United Kingdom, France, India, and Russia, China's total infrastructure is leading, but per capita is lagging behind, so that China's infrastructure still has a certain amount of space.
In the short to medium term, infrastructure investment in the second half of the year will likely make efforts to underpin the economic downturn.
Under the circumstances of downward pressure on exports and real estate and average consumption performance, the July 30 Politburo meeting emphasized that “proactive fiscal policies must enhance policy effectiveness, secure the bottom line of the “three guarantees” at the grassroots level, and reasonably control budgetary investment and local government bond issuance. Progress will promote the formation of physical workload at the end of this year and the beginning of next year.” The
market generally expects that infrastructure construction will begin in the second half of the year, especially from September to November, and demand for construction machinery is expected to improve. At this time, infrastructure companies with low valuations and high dividends are expected to get more Workload and income are expected to usher in investment opportunities.
Related companies in the infrastructure industry mainly include Sany Heavy Industry, Zoomlion, CRRC, China Railway, China Railway Construction, China Power Construction, China Communications Construction, China Chemical, etc. These companies are mainly responsible for infrastructure construction machinery, railway high-speed rail transportation, etc. Project, revenue growth is closely related to infrastructure investment, and infrastructure-related ETFs are also worthy of attention at the same time.
(Author: Li Haitao, Professor of Finance at Cheung Kong Graduate School of Business, Associate Dean of Chinese/Finance MBA Program, Lin Xi, Research Assistant at Cheung Kong Graduate School of Business)