Analysis and Policy Recommendations on the Current Macroeconomic Situation in...
Title: Analysis and Policy Recommendations on the Current Macroeconomic Situation in China
— An exclusive interview with YIN Yanlin, Vice Chairman of the Committee on Economic Affairs of the National Committee of the Chinese People’s Political Consultative Conference
Author: GAO Zhanjun ,YIN Yanlin
Since the beginning of 2024, the Chinese economy has been gradually recovering and showing an overall positive trend. Positive momentum is steadily building in economic activity, as positive contributors are rising. In the first quarter, the gross domestic product (GDP) increased by 5.3% year-on-year, the consumer price index (CPI) showed positive year-on-year growth, and the steady growth of the national economy laid a firm foundation for achieving the annual growth target.
However, it is also essential to acknowledge that China's economic development is encountering a mix of strategic opportunities and risk challenges. The momentum of the global economic recovery is diverging, uncertainties such as monetary policies adjustments in developed economies and geopolitical conflicts persist, and the sustained recovery of the domestic economy still faces many challenges.
In such a complex context, how should we objectively view China's macroeconomic situation? What are the issues that need to be resolved? What will be the future direction and operational considerations for macro policies? To explore these key issues, Dr. GAO Zhanjun, executive Editor-in-chief of China Forex, conducted an exclusive interview with Mr. YIN Yanlin, Vice Chairman of the Committee on Economic Affairs of the National Committee of the Chinese People's Political Consultative Conference.
Discussion 1
Current Macroeconomic Situation in China
Dr. GAO: Data show that since the beginning of this year, China's economy has started steadily with good momentum, showing some positive marginal changes. How do you assess the current macroeconomic situation in China?
YIN Yanlin: Simply put, after three years of turmoil precipitated by the pandemic, China's economy is gradually returning to a path of regular growth. By "normal", I mean "normal operation and functioning" rather than "normal cycle". In other words, the economy is now able to function normally, while determining the specific stage of the cycle requires a different assessment. Overall, since the beginning of this year, the effects of previous policies have gradually become apparent, and China's economy has made a good start. In the first quarter of this year, GDP grew by 5.3% year on year, 0.1 percentage points faster than in the fourth quarter of last year. Specifically, the overall growth of industrial production has accelerated, new quality productive forces are leading the transformation and upgrading, the growth rate of investment has rebounded significantly, exports of foreign trade have shown remarkable momentum, and activity in the real estate market has gradually increased. These positive changes fully demonstrate the potential of China's economic development and the effectiveness of macroeconomic policies.
Against this backdrop, the economic climate has experienced a significant improvement. The Manufacturing Purchasing Managers' Index (PMI) has returned to the expansion zone. According to the National Bureau of Statistics (NBS), the manufacturing PMI, derived from 31 major industry categories in the manufacturing sector with 3,200 survey samples and 43 major categories in the non-manufacturing sector with 4,300 survey samples, reached 50.8% in March. This marked a 1.7 percentage point increase from the previous month, exceeding the critical point and returning to the expansion zone after five months. Of the 21 industries surveyed, 15 were in the expansion zone, an increase of 10 from the previous period. This indicates a significant expansion in economic activity. The PMI for small enterprises rose to the expansion zone for the first time in 12 months, indicating a slight acceleration in production and operations. Additionally, according to a survey of over 60,000 industrial enterprises below designated size, the business climate index in the first quarter rose above the climate line, up 1.0 point from the fourth quarter of last year and 5.0 points from the same period last year, reaching the highest level for each quarter since 2022. Among them, the manufacturing climate index was higher than the survey average, increasing by 1.2 points from the fourth quarter of last year, showing the largest increase. Among the surveyed small and micro industrial enterprises, 81.3% reported good or average production and operating conditions, an increase of 1.6 and 5.5 percentage points from the fourth quarter of last year and the same period last year, respectively. However, it is also noted that the real estate sector continues to decline, with the national real estate climate index compiled by the NBS in March at 92.07, 5 basis points lower than the previous month and 256 basis points lower than the same period last year.
Discussion 2
China's industrial production growth has accelerated
Dr. GAO: As mentioned above, China's industrial production growth has accelerated overall, new quality productive forces are leading the transformation and upgrading, the investment growth rate has experienced a significant improvement, and foreign trade exports have shown notable momentum. Please elaborate on these positive trends.
YIN Yanlin: Indeed, there are signs of marginal improvement in these areas. Specifically, they have the following characteristics:
Industrial production has accelerated overall. In the first quarter, industrial added value above designated size increased by 6.1% year on year, 0.1 percentage points faster than in the fourth quarter of last year. Among them, the value added of the manufacturing industry grew by 6.7%, up by 0.4 percentage points from the fourth quarter of last year. The scope of industries and sectors that have experienced growth has expanded. Among the 41 major industry categories, 37 industries achieved year-on-year growth, accounting for 90.2%, an increase of 24.3 percentage points compared to the fourth quarter of last year. Among the 619 major industrial products surveyed, 406 products saw production growth, accounting for 65.6%, an increase of 5.4 percentage points compared to the fourth quarter of last year. It is evident that industries are recovering better than sectors. Does this imply that the macroeconomy is recovering faster than the microeconomy? Microeconomic recovery needs to be translated into a specific enterprise and product production. Looking at products, only over 65% show economic improvement. Of course, it is naturally more challenging for industries with excess production capacity to restore growth. Combining changes in capacity utilization rate may provide a better explanation. In the first quarter, the capacity utilization rate of industrial enterprises above designated size was 73.6%, down by 0.7 and 2.3 percentage points year-on-year and quarter-on-quarter, respectively, hitting a new low since the second quarter of 2020. From January to February, profits of industrial enterprises above designated size nationwide fell from 2.3% in the whole year of last year to 10.2% year-on-year growth. Among the 41 major industry categories, profits in 29 industries increased year on year, accounting for 70.7% of the total, and profits of small enterprises increased by 18.9%, with a significant improvement in efficiency. However, we can see that the growth in industry profits is lower than the growth in output value, indicating situations of increasing production without increasing income, or increasing income without increasing profits.
New quality productive forces are leading to transformation and upgrading. In the first quarter, the value added of the high-tech manufacturing industry increased by 7.5% year-on-year, 1.4 percentage points higher than the average level of all industrial enterprises above designated size, and 2.6 percentage points faster than the fourth quarter of last year. Among them, the value added of industries such as intelligent vehicle equipment manufacturing, semiconductor device special equipment manufacturing, and integrated circuit manufacturing increased by 61.5%, 40.6%, and 18.5% respectively. The value added of the equipment manufacturing industry increased by 7.6% year on year, 1.5 percentage points higher than the average level of all industrial enterprises above designated size, contributing to a 2.3 percentage point rise in the growth of all industrial enterprises above designated size. Among them, the value added of the electronics industry increased by 13.0%, and the automobile industry increased by 9.7%. Looking at related products, the output of 3D printing equipment, integrated circuits, civil steel vessels, and service robots increased by 40.6%, 40.0%, 38.8%, and 26.7% year on year, respectively.
Overall, investment growth has rebounded. In the first quarter, fixed asset investment increased by 4.5% year-on-year, 1.5 percentage points faster than last year. Manufacturing investment and infrastructure investment increased by 9.9% and 6.5% respectively, accelerating by 3.4 and 0.6 percentage points. The significant role of major project construction is evident, with investment in large projects with a planned total investment of 100 million yuan or more increasing by 11.7% year-on-year in the first quarter, driving overall investment growth by 6.2 percentage points. Among them, investment in projects with a planned total investment of 1 billion yuan or more increased by 13.5%, 1.8 percentage points higher than that in projects with an investment of 100 million yuan or more. Private investment showed some improvement, with a 0.5% increase from a year earlier.
Foreign trade exports have accelerated. According to customs statistics, in the first quarter, the total value of China's goods trade imports and exports reached 10.17 trillion yuan, an increase of 5% year-on-year. Specifically, exports amounted to 5.74 trillion yuan, an increase of 4.9%, and imports reached 4.43 trillion yuan, an increase of 5%. Compared with the fourth quarter of last year, exports and imports accelerated by 4.1 and 2.3 percentage points, respectively, reaching a new high in six quarters. External demand contributed 14.5% compared to -3.1% in the previous quarter. Export momentum for electromechanical and labor-intensive products remained strong. Export of electromechanical products increased by 6.8%, accounting for 59.2% of total exports; among them, automobiles and ships increased by 21.7% and 113.1% respectively. Export of labor-intensive products increased by 9.1%, textiles and garments, plastic products, and furniture and parts thereof increased by 5.4%, 14% and 23.5% respectively. The role of China-Europe Railway Express further strengthened, with 4,541 trains operating and 493,000 TEUs of goods shipped, marking year-on-year increases of 9% and 10% respectively.
Discussion 3
The real estate market is crucial for stabilizing economic landscape
Dr. GAO: Real estate remains the pillar industry of China's national economy. Promoting the healthy development of the real estate market is crucial for stabilizing the entire economic landscape. What is your opinion on this?
YIN Yanlin: The real estate industry is not only the backbone of China's economy, but also an important driver of GDP growth. It contributes directly and indirectly to nearly one-third of China's GDP, and stimulates the development of related industries such as construction, steel, cement, furniture, and home appliances, forming a huge industry chain. Until emerging industries capable of replacing real estate as the economic pillar are established, this important industry cannot be easily disrupted.
In recent months, the real estate market activity has been gradually increasing. Since last year, various regions have continuously optimized their real estate policies, including lowering mortgage rates and lifting some purchase restrictions, injecting new impetus into the housing market. Since this March, although the overall home sales have not shown a significant rebound, there have been clear positive signs in first-tier cities. In March, the number of second-hand houses sold in Shenzhen exceeded 5,000 units, with a month-on-month growth of more than 110% and a year-on-year increase of 5%, reaching a new high in nearly three years. The number of second-hand homes sold in Beijing reached 14,000 units, a record high in a year, while in Shanghai, the number of second-hand homes sold reached 20,000 units, hitting a new high in the second half of the year. The market for new properties in first-tier cities has also shown strong performance. By the end of this March, the sales volume of Zhonghai Shunchang Jiuli in Shanghai approached 20 billion yuan, breaking the transaction record in first-tier cities. Historically, property price increases have often started in first-tier cities and then spread to second and third-tier cities.
I am cautiously optimistic about the trend in the housing market. Looking at the medium to long term, China's rigid housing demand and demand for better homes remain significant. With these adjustments in real estate policies, China’s real estate market will move towards a stable and healthy development track.
Discussion 4
Significant Issues in the Current Macro Economy
Dr. GAO: Based on macroeconomic indicators reported so far this year, China’s economic performance appears to be on an upward trend with increasingly robust positive factors driving growth. This suggests a positive long-term trajectory for the economy. However, it is also important to be aware that maintaining this positive momentum of economic recovery still faces many challenges, and there are still some significant issues in the current macro economy that cannot be ignored.
YIN Yanlin: Indeed. While some indicators suggest that "the first quarter got off to a good start", as was said last year, it is noteworthy that the NBS and the National Development and Reform Commission only mentioned "a steady and good start". I believe there are a few reasons for this. Firstly, while some indicators suggest that "the first quarter got off to a good start", just like it was said last year, it is notable that the NBS and the National Development and Reform Commission only mentioned "a steady and good start". I believe there are a few reasons for this. Firstly, they're more cautious this year to avoid the excessive optimism of last year. Second, there are signs of marginal weakening in some indicators. Whether this improvement can be sustained still needs to be observed. Thirdly, there are indeed some problems in the current economic operation that are not optimistic. These problems can be sorted out and analyzed from different perspectives, mainly including the following aspects from a superficial point of view.
The market price level is too low. I think this is the most significant macroeconomic issue in China currently. Prices reflect the comprehensive relationship between supply and demand in the market. Currently, the overall trend of the supply and demand relationship in China is characterized by low prices, deviating from a reasonable range, with weak upward momentum and significant downward pressure. Looking at the consumer market, last year's CPI continued to show negative year-on-year growth since October. In 2023, the CPI rose by 0.2%, but in January this year, it declined by 0.8% year on year. It turned positive in February, rising by 0.7%, but in March, the year-on-year increase fell to 0.1%. In the first quarter, the year-on-year increase in CPI was the lowest in the same period in the past 10 years. In March, the CPI decreased by 1% month on month. Although this conforms to seasonal patterns, the decline exceeds the historical level of the same period. In the production sector, the producer price index (PPI) fell by 2.7% year on year in the first quarter, marking the largest decline since 2017 for the same period. In March, the PPI dropped by 2.8% year on year, expanding by 0.1 percentage points from the previous month, marking the 18th consecutive month of decline. Overall, the GDP deflator for the first quarter was -1.3%, a decrease of 2.2 percentage points compared to the first quarter of the previous year, and a decrease of 0.3 percentage points compared to the entire previous year.
According to the data released by the NBS on May 11, the CPI rose by 0.3% year on year in April, an increase of 0.2 percentage points, while the Core CPI, excluding food and energy prices, accelerated by 0.1 percentage points to 0.7% year on year. The PPI fell by 2.5% year on year, narrowing by 0.3 percentage points. It can be said that the year-on-year increase in CPI in April exceeded market expectations, while the improvement in PPI was lower than expected. Although there are signs of marginal improvement, it remains weak, and whether it can continue requires further observation. Secondly, there are signs of marginal weakening in some indicators. Whether this improvement can be sustained remains to be seen. Thirdly, there are indeed some issues in the current economic operation that are not optimistic. These issues can be organized and assessed from various perspectives. These include the following main aspects.
Firstly, the current market price is below the accepted level. I think this is the most significant macroeconomic issue in China currently. Prices reflect the comprehensive relationship between supply and demand i