China's economy ends stably in 2021

  Text / Zhong Zhengsheng Zhang Lu

  Published in the 1030th issue of "China News Weekly" on January 24, 2022

  On January 17, 2022, the report card of China's economy in 2021 was released.

According to data released by the National Bureau of Statistics, China's GDP in 2021 will increase by 8.1% year-on-year. In terms of quarters, the first-quarter GDP will increase by 18.3%, 7.9%, 4.9%, and 4.0% year-on-year, respectively.

In 2021, consumption, investment and net exports will drive economic growth by 5.3, 1.1 and 1.7 percentage points respectively.

  Since the new crown epidemic, the two-year average growth rate of China's GDP in 2020 and 2021 is 5.1%, and the two-year average growth rates in each quarter are 5.0%, 5.5%, 4.9% and 5.2% respectively.

In general, in the past two years, China's economic slowdown has been mainly dragged down by final consumption expenditures, while external demand has played a positive role.

  Compared with the 6% growth of China's economy in 2019 before the epidemic, while the growth slowed down, the transformation of China's economic structure after the epidemic has prominent features: the traditional stable growth momentum - the growth rate of real estate and infrastructure lags behind the pre-epidemic level; The high-energy-consuming industries connected with it have become a drag, while the equipment manufacturing and high-tech industries have gained stronger growth momentum than before the epidemic; the online consumption caused by the epidemic and the offline consumption restricted by the epidemic are polarized.

  Facing 2022, although a better balance between economic growth and green transition, the correction of commodity prices to improve mid-stream and downstream profits will provide support for the stabilization of China's economy in 2022.

However, on the demand side, in addition to manufacturing investment, the constraints on economic recovery are becoming more and more obvious. It is necessary to take multiple measures in monetary, fiscal and industrial policies to prevent the economy from entering the "contraction of total demand - the decline of residents' spending power and the decline of enterprises' willingness to invest - demand further contraction” in the downward inertia.

China's economy improved in the fourth quarter

  In the fourth quarter of 2021, the seasonally adjusted growth rate of China's GDP rose from 0.7% in the third quarter to 1.6%. From the two-year average growth rate, China's economic growth rate in the fourth quarter rebounded from 4.9% in the third quarter to 5.2%, showing that the economy This is an improvement over the third quarter.

This is mainly due to the rectification of the implementation of the "double control of energy consumption" policy.

  In October, the carbon peaking and carbon neutral top-level design documents were released, and it was proposed that "new renewable energy and raw material energy consumption should not be included in the total energy consumption control", so that the upstream industrial raw material production constraints were relaxed, while the middle and downstream industries were Benefiting from the fall in high raw material prices, the monthly growth rate of industrial added value for three consecutive months in the fourth quarter picked up.

  At the same time, counter-cyclical adjustment policies are also accelerating and increasing.

The accelerated issuance of local government special bonds to form a physical workload as soon as possible, and the central bank’s immediate adoption of a comprehensive RRR cut tool to boost demand after the Central Economic Work Conference are two typical examples of counter-cyclical policies.

  Specifically, in the fourth quarter, the contribution of net exports to GDP remained at 1%, and the support of external demand to China's economy was relatively stable.

In particular, the emergence of the Omicron virus strain disrupted the pace of resumption of work and production in some overseas economies, and continued the high boom in China's exports.

  In the fourth quarter, the contribution of investment to GDP further fell to -0.5%, the second lowest since 2015 (the lowest was in the first quarter of 2020).

Among them, in addition to the relatively good performance of manufacturing investment, infrastructure investment is still sluggish under the dual constraints of "lack of funds" and "lack of projects", and real estate investment has fallen into deep adjustment under multiple shocks.

  In addition, in the fourth quarter, the contribution of final consumption expenditure to GDP fell to 3.4%, and consumption growth still did not return to the level before the epidemic.

The slowdown in the growth of residents' disposable income, the widening of the income gap between residents, and the increase in the leverage ratio of the household sector have all increased residents' propensity for precautionary savings, and how to boost consumption has become a medium- and long-term challenge.

Real estate investment and infrastructure investment  

lower than pre-pandemic levels

  In 2021, various economic indicators will generally be further repaired from the low base in 2020, with only real estate investment and infrastructure investment being two exceptions.

  The two-year average growth rate exceeded the level before the epidemic: industrial added value (especially high-tech industries), export delivery value, and manufacturing investment.

In 2021, the industrial added value will increase by 9.6% year-on-year, with an average growth of 6.1% in the two years, slightly higher than the 5.7% in 2019.

Among them, in 2021, the high-tech industry will increase by 18.2%, and the equipment manufacturing industry will increase by 12.9%. The average growth rate of the two years has significantly exceeded that before the epidemic.

  Manufacturing investment in 2021 can be described as "thriving" in fixed asset investment.

That year, manufacturing investment increased by 13.5% year-on-year, a sharp acceleration from -2.2% in 2020; the two-year average growth rate was 5.4%, which was also a significant rebound from 3.1% in 2019.

Manufacturing investment has benefited from the continued high boom in exports and targeted support from monetary policy for medium and long-term loans to the manufacturing sector.

In addition, the start of a new round of production capacity cycle has also provided fundamental momentum for investment in manufacturing.

  Looking back at the capital expenditure cycles of listed manufacturing companies since 2006, the capital expenditure in each cycle was at a high year-on-year level for about two years, and during this period, the growth rate of manufacturing investment was usually stable and rising.

This round of capital expenditure cycle starts to reach a high level in the first quarter of 2021. Referring to previous experience, the driving force of capital expenditure cycle on manufacturing investment is expected to run through 2022.

The correction in commodity prices will also help release the investment demand of manufacturing enterprises.

  Investment in real estate development will increase by 4.4% year-on-year in 2021 and 7% in 2020; the average growth rate for the two years is 5.7%, a sharp decline from 9.9% in 2019.

Since June 2021, this indicator has continued to decline, and the Evergrande incident is the fuse. The superimposed policies of the “three red lines” for real estate financing, the “two ceilings” for real estate loans, and the “two centralization” management systems for land supply are its root cause.

  In December 2021, the source of real estate development funds fell again year-on-year across the board, including personal mortgage loans and self-raised funds that had been continuously recovered from October to November; the two-year average of real estate sales in the same month had a negative growth for the fifth consecutive month. The price of new commercial housing in 70 large and medium-sized cities has experienced negative growth for four consecutive months; the two-year average growth rate of newly started housing area has dropped to -14.4% again, and the scale of negative growth since the fourth quarter of last year has further expanded.

  It can be seen that the adjustment of the real estate market's "blunt knife to cut the flesh" is still in progress.

Undoubtedly, this poses a great challenge to the steady growth of real estate investment in 2022.

However, it is not appropriate to simply extrapolate the prospects of China's real estate market in a linear manner. As the policy adjustment becomes clearer and more refined, the bottom of real estate investment is expected to gradually approach.

  Infrastructure investment will increase by 0.2% year-on-year in 2021 and 3.4% in 2020; the average growth rate for the two years is 1.8%, down from 3.3% in 2019.

Since the epidemic, infrastructure investment has accelerated growth in electric power heating, storage, pipeline, aviation, water transportation, and water conservancy management, respectively reflecting the progress of green transformation, making up for shortcomings and major engineering projects; while in public facilities management, road transportation, In terms of ecological environmental protection, gas and water production and supply, investment has slowed down significantly, indicating that the development of traditional infrastructure has begun to slow down and has become the dominant force affecting the direction of infrastructure investment.

  This issue of the ebb and flow between the new infrastructure and the old infrastructure, or the issue of "no connection between green and yellow" needs more attention.

Since the COVID-19 outbreak, China's infrastructure investment has clearly shifted to new infrastructure, driving the growth rate of investment in electric power, storage, pipelines, aviation, water transportation, water conservancy management and other fields to accelerate compared with before the epidemic, but the core area of ​​old infrastructure - public facilities management ( The significant slowdown in the road transportation industry (accounting for 39.4% of the infrastructure investment in 2017) and the road transportation industry (accounting for 23.3%) is the key to the continued downturn in infrastructure investment in the past two years.

  The fundamental reason is that the local government special debt has a low degree of matching with the old infrastructure, which requires that the project can achieve self-balancing of benefits.

The requirements for the supervision of special bonds have not changed from the "Notice on Declaration of Funding Requirements for New Special Bond Projects in 2022" jointly issued by the Ministry of Finance and the National Development and Reform Commission in September 2021.

Therefore, it is expected that investment in new infrastructure, major projects, and affordable housing will increase at an accelerated rate in 2022. In the first quarter, due to the dislocation of capital supply, the growth rate of infrastructure investment is expected to rise, but its sustainability and magnitude should not be overestimated.

Risks and Challenges Facing China's Economy in 2022

  It is expected that China's real GDP will grow by 5.3% year-on-year in 2022, and the year-on-year growth rates in the four quarters will be 5.2%, 4.8%, 5.7% and 5.3% respectively.

China's economy will maintain a reasonable range while adhering to high-quality development.

  It is worth noting that in 2022, the overall overseas economy is still in the stage of recovery from the epidemic, and the pace of its opening up of the economy, the pace of economic recovery, and the pace of policy normalization may be further accelerated.

This will bring about a series of new changes in the spillover effects of overseas economies and policies on China, which are highlighted as "three dislocations": "poor opening up" in epidemic prevention and control, "period difference" in economic growth, There is a "poor tightness" in the policy.

  First of all, there is still a high degree of uncertainty in the evolution of the new crown epidemic. Whether it can change from "dynamic clearing" to "flu-based" treatment, China's optimal strategy is to wait for developed countries to "try first".

The direction of the virus mutation is that the transmission ability is getting stronger and stronger, which will lead to further increase in the economic cost of China's epidemic prevention and "openness gap" with overseas economies. It is necessary to better handle the relationship between stable growth and epidemic control. .

  Second, the economic recovery cycle between China and the United States in 2022 will be dislocated.

The IMF's latest forecast for China's economic growth in 2022 is 5.6%, slightly lower than the 5.8% predicted before the epidemic in January 2020; but the US economic growth rate reached 5.2% in the same period, significantly higher than the "normal" level of about 2% before the epidemic. .

The reason may be that the monetary and fiscal stimulus of the US government not only quickly made up for the impact of the epidemic on the US economy, but also increased the potential growth rate of the US economy.

  It should be noted that the continuation of China's excellent export performance in 2022 may face challenges.

In the first quarter of 2022, the spread of the overseas new crown epidemic is still conducive to the maintenance of China's export boom.

But for the whole year, it is still necessary to pay close attention to the risk of a recession in China's export boom.

In addition to the weakening of the spillover effect of the U.S. economy, three unfavorable signs are currently observed: the severe supply chain bottleneck problem under the new crown epidemic has made developed countries pay more attention to the stability of their own supply chains, and the process of "de-globalization" may have Speed ​​up; from July to September 2021, China's export market share advantage has narrowed significantly, the world has become more adapted to coexisting with the epidemic, and production capacity has shown signs of significant recovery; after deducting price factors, since July 2021, China's export Quantitative growth has declined significantly, with about half of export growth due to price factors.

Even if the price factor is not considered and will weaken as commodity prices peak, the pull effect of exports on China's economy is already showing signs of weakening.

  Thirdly, this round of Fed tightening cycle has brought new challenges and risks.

In 2022, the dislocation of the recovery cycle between China and the United States determines the dislocation of monetary policy: the United States will tighten and China will become looser.

However, there is still room for China's monetary policy to support stable domestic growth "mainly on me".

On the one hand, the current Sino-US interest rate gap can still provide a sufficient "moat"; on the other hand, the RMB exchange rate can be more flexible.

In the future, if the RMB depreciates "following the trend" when the US dollar strengthens periodically, it can not only release the pressure of loose domestic liquidity, but also hedge against the risk of China's export boom, and also help release the policy signal of "steady growth" and then stabilize market expectations. It has the effect of "three birds with one stone".

  In addition to the "three dislocations", the recovery of household consumption will face medium and long-term challenges.

This is mainly reflected in three aspects: first, the debt repayment burden will continue to suppress residents' consumption capacity; second, in 2022, there may be a simultaneous increase in the pressure to stabilize employment and the coming of retirement tide, which will drag down the marginal consumption tendency; third, from December 2021 to the present in many places in China There is a local local epidemic, and there is still the possibility of multiple domestic epidemics in 2022.

  In addition, at present, the shortcomings of private enterprises are prominent, and the transition from increasing revenue without increasing profits to declining demand is expected to continue to deteriorate.

With the fall in commodity prices, the problem of "increasing revenue without increasing profits" for private enterprises will be alleviated in 2021, but weak terminal demand in 2022 will become the main source of pressure for private enterprises, and private enterprises' business expectations will deteriorate.

From the perspective of the manufacturing PMI, the production and operation activities of small manufacturing enterprises are expected to drop to 47.9 in December 2021, falling below the line of prosperity and decline. The entrepreneur confidence index released by the National Bureau of Statistics also shows a similar situation.

  In response to the above risks and challenges, China's economy will be stable and long-term in 2022. It needs to make a difference in fiscal policy, monetary policy, and industrial policy to avoid the economy from entering the "contraction of total demand - the decline of residents' spending power and the decline of enterprises' willingness to invest - further demand. shrinkage" in the downward inertia.

The contractionary policies introduced in the early stage also need to be adjusted appropriately, focusing on the overall development of the economy, the new and old economies must achieve a smooth transition, and the digital economy and the real economy should also be given equal attention.

  (Zhong Zhengsheng is the chief economist and research director of Ping An Securities, and Zhang Lu is a senior macro analyst at Ping An Securities Research Institute)

  "China News Weekly" Issue 4, 2022

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