Immediate Restart of the Economic Cycle
As the third quarter draws to a close, and data begins to finalize, the overall economic landscape becomes increasingly evident. Earlier in the year, projections indicated a pattern for 2024: a strong start followed by a dip in the first half, with a recovery anticipated in the latter half. It's clear that the third quarter will reflect this dip, with benchmarks predicting a growth rate of approximately 4.6%. However, whether the fourth quarter can bounce back remains arguable, as the entire pressure to achieve the annual growth target of 5% now falls upon those final three months.
Achieving this target is no simple feat. Let's break down the contributions to economic growth in the first half of this year: out of the 5% growth, consumption was responsible for 3 percentage points, investment contributed 1.3 points, while exports added 0.7 points. This suggests that the primary engine of economic growth has been driven by domestic demand, at least on the surface. It is critical to note that the 0.7 points attributed to exports represent only direct contributions; a broader analysis indicates that when factoring in the manufacturing investments stimulated by exports, the total contribution may exceed 60%. Although I suspect this figure is somewhat inflated, it does imply that exports significantly impact overall growth.
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One notable trend over the past two years, however, has been the weakening of the link between export earnings and domestic demand. Normally, foreign trade entities convert earnings into Chinese renminbi, subsequently fueling local consumption and investment—whether through spending on leisure, buying homes, cars, or investing in stocks and bonds. Yet, recently, despite a surplus amounting to hundreds of billions annually, the conversion of foreign currency has been minimal, causing reserves to stagnate. This consolidation of currency, surviving per se, turns foreign exchange into mere assets within the national context, failing to generate tangible consumer or investment activity. Thus, the critical indirect effect of exports on stimulating the economy seems to be waning. The challenges prompted by this disconnect result in persistent internal deflation and external inflation, complicating recovery efforts.
Looking back at the economic trends over the first three quarters, one can identify key patterns:
1. The first quarter saw a surge attributed to the deployment of policy resources from the previous fourth quarter, indicating a strong start. Yet, this momentum quickly diminished in the second quarter, with GDP growth plummeting from 5.3% in the first quarter to 4.7% in the second.
2. During the second quarter, there was supportive policy momentum—further reductions in interest rates and stimulating efforts in the real estate sector. However, the third quarter marked a policy hiatus leading to an accelerated downturn in economic performance; manufacturing PMI dipped below the neutral point for the first time in six months. This suggests the third quarter may register the lowest annual GDP growth.
3. As economic indicators faltered in the third quarter, the stock market experienced significant volatility. A new policy emerged towards the end of the quarter, propelling indices upward from below 2700 to nearly 3700, resulting in an extraordinary bounce of around 1000 points. Nonetheless, the volatility prompted policymakers to reinforce stability measures; the initial bullish momentum faced setbacks, leading to a new phase of policy implementation involving increased liquidity and expedited fiscal investments.
4. If GDP growth in the third quarter hovers around 4.7%, achieving a growth target of 5.3% in the fourth is paramount. While it won’t be effortless, the resources available are substantial. The authorities have emphasized fully utilizing existing policies, leveraging the 2.3 trillion yuan in issued but unutilized special bonds, which can facilitate real estate purchases. Moreover, the potential use of over a trillion new special government bonds for banking and credit enhancement is noteworthy.
In this context, it's vital to consider how the Chinese economy will navigate the fourth quarter. A fundamental skill in macroeconomic analysis is simplifying complexities down to pivotal contradictions. Presently, the country's core economic problem remains inadequate demand, which has incited various issues like oversupply and debt constriction—these are reflections of insufficient internal demand. However, external demand exhibits relative resilience amid global inflation.
Concisely, the primary driver behind insufficient domestic demand is the ongoing adjustment in the real estate market. This sector’s turbulence significantly undermines investment and durable goods demand, both of which overwhelmingly influence economic vitality.
It follows that until the real estate sector stabilizes, the momentum for demand contraction remains pronounced. The ripple effects of the real estate adjustment shape the structural changes in local demand, financing, wealth accumulation, and overall market sentiment. Compounding this issue, local infrastructure projects, closely tied to real estate, are also seeing similar contraction trends, pulling down GDP growth by over 1 percentage point.
Should export performance continue to falter, this will leave a significant gap of approximately 1.4 trillion yuan unfilled. Thus, dependence solely on domestic demand becomes paramount. To revive this internal cycle, fiscal policy must serve as the motivator for renewed investment demand. Given the fiscal multiplier observed to be around 0.8, a supplementary investment of at least 1.75 trillion yuan becomes essential, contingent on the effective deployment of existing special bond funds.
Consequently, combining existing policy resources with additional fiscal measures, achieving a financial expenditure of approximately 4 trillion yuan in the fourth quarter is critical. Following the subprime mortgage crisis of 2008, a 4 trillion yuan stimulus was rolled out to bridge demand gaps. However, we now find the M2 supply seven times greater than pre-crisis levels, accompanied by significant escalation in overall debt. Hence, producing similar effects requires immense policy potency.
At this pivotal fourth quarter, in light of weak external conditions, achieving the annual economic targets will necessitate an additional allocation of about 1.5 trillion yuan in fiscal policies to reignite domestic dynamics. As time races forward—over a month has already elapsed—this drive towards accomplishing policy goals will likely create an extraordinary end-of-year surge. Yet, based on a history of cautious strategic positioning from the leadership, there’s a high chance the ambition to maintain a 5% growth will be softened to approximately 4.8%, aiming to carve out adequate space for sustainable, high-quality development in the coming year.