The effect of the steady growth policy is becoming more visible. Recent macroeconomic data has shown gradual improvement, but the economy in the third quarter faces challenges in maintaining the growth rate seen in the first half of the year. First, the growth rate of real estate investment may decline further. Second, the base from last year was higher, making it harder to sustain momentum. Third, local financial resources may become a constraint for sustained growth. Reports indicate that available local government funds have dropped by about 1.2 trillion yuan this year.
Analysts suggest that to counteract the sharp decline in real estate investment growth, monetary policy needs to be eased further. However, this alone is not enough — easing monetary conditions may not necessarily stabilize real estate investment growth. To address the decline in local government finances, the central government must act more effectively. Since May, fiscal spending has become more active, but more efforts are needed moving forward. Reforms in sectors like public utilities and state-owned enterprises, which aim to break monopolies and introduce private capital, are also expected to accelerate.
Domestic demand remains relatively weak. The positive impact of the steady growth policy continues to show, with the economy expected to rebound in June. Industrial output is projected to grow by 9%, up 0.2 percentage points from the previous month. Credit growth is expected to rise by 139.5 billion yuan compared to the same period last year. The target of 9.5 trillion yuan is estimated to be 59.6% achieved in the first half of the year, aligning with the planned credit control rhythm. M2 growth is expected to reach 13.6% in June, a slight increase of 0.2 percentage points from the previous month.
Shenwan analyst Li Huiyong believes the economy will continue to rise due to policy support. "The effect of the 'micro-stimulus' policy is gradually emerging, and economic recovery may be nearing a turning point in the short term," said Chen Guanglei from Hongyuan Securities. He noted that industrial output in March, April, and May 2014 was 8.8%, 8.7%, and 8.8% respectively, with expectations of a slight stabilization in June. Fixed asset investment growth, which had declined over the past months, is expected to stabilize in the near term.
While some market voices are optimistic about the improving macro data, there remains significant uncertainty about how long this trend will last and to what extent it can improve. Some meso-level data suggest that the foundation for the current macroeconomic improvements is still weak. For example, the BPI of the Commodity Price Index remained at around 890 points in early June, barely rising from 896 points in late May. Prices of commodities like rebar, anthracite coal, and cement have continued to fall throughout June.
Essence Securities’ research report highlighted that China’s economy is in a stalemate, with external demand recovering while domestic demand remains weak. The increase in export growth and trade surplus clearly reflects the role of exports in driving the economy. However, domestic investment demand is still sluggish, as seen in the weak growth rates of cement and steel production and their prices. While government micro-stimulus measures may provide some support, they may not fully offset the declines in real estate and manufacturing investment. Additionally, the expected improvement in microeconomic entities has yet to materialize.
Economic pressures in the third quarter are expected to intensify. Analysts believe that while the second-quarter growth rate may be close to that of the first quarter, the third quarter could see a slowdown. The downward pressure on real estate investment growth is expected to become more evident. With a high base from last year, maintaining a 7.5% annual growth rate will be challenging.
Haitong Securities analysts pointed out that demand, especially investment demand related to industrial products, has not significantly improved and remains low. In the context of temporary stability, sluggish prices are mainly due to supply-side pressures. The growth rate of finished goods inventory has continued to rise this year, reaching a high point in recent years and significantly exceeding levels from 2013, indicating an unfavorable inventory situation that is worse than the same period last year.
Minsheng Securities analysts noted that the decline in real estate sales area is likely to translate into lower real estate investment, which will become more apparent in the third quarter. It is possible that the growth rate of real estate investment in certain months may fall below 10%. Considering that the third quarter of last year was a peak, maintaining a 7.5% growth rate this year will be difficult. Data shows that from January to May, national real estate development investment reached 3,073.9 billion yuan, up 14.7% year-on-year, but the growth rate fell 1.7 percentage points from the first four months. Commercial housing sales area decreased by 7.8% year-on-year, although the decline narrowed slightly in April.
To prevent the economy from experiencing excessive exhaustion after a short-term rebound, the steady growth policy needs to be further strengthened. For instance, due to the high base effect, coal consumption growth has already dropped sharply in late June, and it is expected to remain weak in July and August. If the power generation growth rate in the second half of 2014 is at the historical average between 2008 and 2013, it is likely to drop sharply in July and August, possibly falling to 4.8% in July and further to 4.3% in August.
Guotai Junan analysts stated that fundamentals have stabilized since late March, mainly due to two factors: the rebound in infrastructure investment driven by expanded fiscal spending and eased monetary policy, and the slow global economic recovery and export improvement driven by RMB devaluation. However, the weak recovery of exports in the third quarter is unlikely to compensate for the large gap left by the housing market downturn. The drag from the housing market depression is clearly affecting consumption, investment, and production. Real estate sales declines have led to reduced consumption, real estate investment, and related manufacturing investment. Land sales revenue and real estate taxation are also dragging down local infrastructure investment.
Reform is the only way forward. Looking ahead, achieving the 7.5% growth target seems inevitable, with steady growth policies continuing to expand. Analysts believe that local governments have started promoting key projects, and the challenge of meeting growth targets is not major. The economy is expected to approach the bottom line in the second half of the year.
Xu Gao, chief economist at Everbright Securities, expects that monetary policy relaxation should continue, particularly in improving financing conditions for the real estate sector. This is a necessary condition to prevent a rapid decline in real estate investment. On the fiscal side, the central government has been active since May, but more efforts are needed in the second half of the year.
Xu Gao pointed out that although China's fiscal policy is nominally "positive," the actual situation is far from that. When fiscal revenue growth is weak, the Treasury's fiscal balance is growing rapidly, showing that fiscal spending has fallen even more. This conservative fiscal policy is a major cause of local debt problems. With limited financial resources, local governments often rely on local government financing platforms to raise funds. This leads to mismatches in fund sources and project nature, inversion of project returns and capital costs, and risks of a debt crisis. Fiscal policy should take more responsibility and assume the financing burden for infrastructure investment.
A Guotai Junan research report showed that in 2014, local available financial resources decreased by 1.2 trillion yuan compared to 2013. In the long run, the future transfer of consumption tax to local taxes could solve capital needs of 80–100 billion yuan, and the opening of municipal bonds could address 50–100 billion yuan in capital needs. However, the consumption tax reform plan is expected to be announced in the second half of the year and implemented in 2015, while the revised budget law and full implementation of municipal bonds will take at least six months.
Shenwan analyst Li Huiyong noted that, in addition to steady growth, reforms that have been included in the plan this year but are not yet obvious are worth watching. Key areas such as public utility reform, state-owned enterprise reform, factor price reform, fiscal and tax system reform, and financial reform are expected to accelerate. Among these, public utility and state-owned enterprise reforms correspond to specific sectors and targets, offering potential for deeper investment value. For example, public utility reform involves breaking monopolies and introducing private capital, creating development opportunities for relevant companies. State-owned enterprise reform may lead to quality asset injections for listed companies.
Guotai Junan analysts emphasized that reform is the only way out. They believe the Chinese economy will "really reform, slightly stimulate, and revive" rather than "fake reform, really stimulate, and collapse."
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