Abstract

The GDP growth in the first half of the year was 5% year-on-year, generally maintaining an upward trend. In particular, the economy started the year with an unexpected strong performance, growing 5.3% year-on-year in the first quarter; however, the growth rate slowed down in the second quarter, with a year-on-year increase of 4.7%. From the data, the current economic operation has continued the basic characteristic of "a strong start in the first quarter, followed by increased downward pressure in the second quarter" observed in previous years, and it is likely to further follow the pattern of "introducing measures to stabilize growth in the third quarter leading to an economic rebound, and a continuation of the upward trend in the fourth quarter with a slight decline." The main reasons for this rhythmic characteristic are: the departments and local governments implemented the arrangements from the Central Economic Work Conference in advance, starting early and working ahead, with policies being proactive, thus leading to a strong start in the first quarter; however, the issues of insufficient overall demand and weak expectations still persist, and the foundation for economic recovery is not solid, leading to a subsequent decline in growth rates.

From the perspective of economic momentum, the first half of the year was mainly driven by unexpected export growth, a higher increase in manufacturing investment, and central fiscal expenditure driving a higher increase in corresponding infrastructure investment. However, the real estate market has not yet stabilized, and tight local fiscal balances have limited local infrastructure development. From the perspective of micro-entities, the enthusiasm of local governments, residents, and entrepreneurs needs to be further improved. The nominal GDP growth rate in the first half of the year was 4.1% year-on-year, lower than the actual growth rate of 5%, and the low inflation directly affects residents' income, corporate income, and fiscal revenue.

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For the second half of the year, it is necessary to fully affirm the effects of some previous policies and continue them, and also to adopt more forceful policies.

In terms of fiscal policy, due to the lower-than-expected land transfer income and general public budget revenue, fiscal expenditure has not met expectations. It is possible to consider studying the possibility of increasing the deficit and issuing additional government bonds. The additional bonds can be used for three purposes: first, to lend to local governments under greater debt pressure to alleviate liquidity risks and promote a return to normal operations from emergency status. Second, to provide some subsidies to university graduates who have not yet found employment and the unemployed, as well as to low-income urban and rural populations, to enhance their risk resistance and consumption capacity, and to maintain social stability. There is no need to worry about fostering dependency, as the unemployment of these university graduates is largely related to the impact of recent pandemics, which is an objective cause rather than a subjective one. The provision of subsidies is an emergency measure, not a regular one, and it has an exit cycle, aimed at creating a more stable economic and social development environment for reforms; it can be implemented on a pilot basis. Third, to invest in major projects in advance for the "15th Five-Year Plan," while also allowing ample time for project preparation to avoid the low efficiency of project packaging and fund usage caused by last-minute project searches.

In terms of monetary policy, despite the constraints of narrowing interest rate differentials and exchange rates, lowering reserve requirements and interest rates remains an option for policy.

In terms of real estate policy, continue to optimize real estate policies and quickly reverse the downward expectation of real estate prices, relax purchase restrictions, increase housing quotas in first-tier cities, shift from optimizing the existing stock to releasing incremental demand; increase government reserves and have the central government address some local funding issues; increase the supply of high-quality commercial housing in core areas.

I. The achievements in the first half of the year are hard-won, some policy effects have been reflected, but greater policy efforts are needed to expand aggregate demand and boost confidence.

1. The price level has moderately rebounded, with the CPI and PPI rising year-on-year from -0.8% and -2.5% in January to 0.2% and -0.8% in June, respectively.

2. Exports continue to warm up, with the global manufacturing PMI staying in the expansion range for six consecutive months, and China's exports rising year-on-year from 1.4% in the first quarter to 8.6% in June.Thirdly, the capacity utilization rate has increased, with the industrial capacity utilization rate in the second quarter at 74.9%, higher than the 73.6% in the first quarter and the 74.5% in the same period last year.

Fourthly, the transformation and upgrading of industries have accelerated, with the added value of high-tech manufacturing accounting for 15.8% of the added value of large-scale industrial enterprises in the first half of the year, an increase of 0.6 percentage points from the first quarter.

Fifthly, the effects of policies aimed at stabilizing growth are gradually becoming apparent, with equipment renewal investment, consumer goods replacement, and central government infrastructure investment all being stimulated to varying degrees.

II. How to understand the economic growth slowdown in the second quarter?

The current external environment is complex, and domestic effective demand is still insufficient. The foundation for economic recovery and improvement needs to be consolidated, which is reflected in the slowdown of growth in the second quarter. The GDP growth rate in the second quarter was 4.7% year-on-year, a decrease of 0.6 percentage points from the first quarter and lower than the market expectation of 5.1%.

On one hand, the economic growth rate in the second quarter was affected by temporary factors such as extreme weather and data "squeezing out water". First, there was the disturbance of extreme weather such as floods in the south and droughts in the north. Since April, the southern region has experienced frequent floods and geological disasters, while the north has seen local high temperatures and droughts, affecting the normal production and life order. Second, there was the "squeezing out water" of financial data, with the added value of the financial industry "losing its puffiness". Since April, financial regulators have prohibited banks from "manual interest supplementation", and statistical departments have optimized and adjusted the accounting method for the added value of the financial industry. The behavior of fund arbitrage and the pressure to inflate deposits and loans have significantly decreased, leading to a continuous decline in loan growth rates, which in turn has lowered the growth rate of the financial industry's added value.

On the other hand, the main reason for the economic growth slowdown is the insufficient domestic effective demand. First, there is a trend towards frugality and risk aversion in consumer spending and housing purchases. The year-on-year growth rate of retail sales in the first half of the year was 3.7%, lower than the 4.7% in the first quarter, and the year-on-year growth rate of real estate sales area in June was still at a low level of -14.5%. Second, there is still a need to boost business investment confidence, with the cumulative year-on-year growth rate of manufacturing investment falling from 9.9% in the first quarter to 9.5% in the first half of the year. Third, the tight balance of local finances constrains local infrastructure investment, with the cumulative year-on-year growth rates of investment in public facility management and road transport industries in the first half of the year being -4.5% and -1%, respectively.

III. The pressure to stabilize growth in the second half of the year may further increase, and it is necessary to consider increasing the fiscal deficit to further raise the growth rate of fiscal expenditure, lowering reserve requirements and interest rates, and increasing the incremental demand for real estate in first-tier cities.

To achieve the annual economic growth target of "around 5%", the GDP growth rate in the second half of the year still needs to be maintained at around 5%. Considering the slowdown in economic growth in the second quarter, and the base period in the second half of the year being higher than in the second quarter, the pressure to stabilize growth in the second half of the year may further increase.

Table of ContentsI. The achievements of the first half of the year are hard-earned, with some policy effects becoming evident

II. How to understand the slowdown in economic growth in the second quarter?

III. The pressure to maintain growth in the second half of the year may further increase, and it is necessary to consider increasing the fiscal deficit to further raise the growth rate of fiscal expenditure, lowering reserve requirements and interest rates, and increasing the incremental real estate demand in first-tier cities

Main Text

I. The achievements of the first half of the year are hard-earned, with some policy effects becoming evident

This year, China's economy has generally continued to improve, with a year-on-year growth of 5% in the first half of the year. Looking at the rhythm, the economy had an unexpected strong start in the first quarter, followed by a slowdown in the second quarter. The GDP grew by 5.3% year-on-year in the first quarter, which was higher than the market's expectation of 4.9% and the 5.2% in the fourth quarter of last year; the growth rate slowed down in the second quarter, with a year-on-year increase of 4.7%.

Economic growth mainly relies on four forces: the continued recovery of service consumption, the warming of exports driven by overseas inventory replenishment, the high increase in manufacturing investment supported by a new round of large-scale equipment renewal policies, and the rapid growth in infrastructure investment driven by the use of additional national bonds issued last year. However, the two core issues of real estate drag and the tight balance of local finances have not been fundamentally resolved, with the cumulative year-on-year decline in real estate investment and local infrastructure investment continuing.

Positive factors for economic recovery are still accumulating step by step:

Firstly, the price level is moderately rebounding. The CPI and PPI rebounded from -0.8% and -2.5% in January to 0.2% and -0.8% in June, respectively, and the GDP deflator rebounded from -1.1% in the first quarter to -0.7% in the second quarter, which helps to accelerate the nominal economic growth rate, the recovery of residents' income, and corporate profits, enhancing the sense of gain for micro-entities.

Secondly, exports continue to warm up. The replenishment of global manufacturing inventories has driven active international trade activities, with the global manufacturing PMI staying in the expansion range for six consecutive months. In June, exports from South Korea, Vietnam, and China's Taiwan region reached year-on-year increases of 5.1%, 12.9%, and 23.5%, respectively. China's exports also continued to rise from 1.4% in the first quarter to 8.6% in June, providing a strong boost to industrial production and economic recovery.Thirdly, the capacity utilization rate has increased. The industrial capacity utilization rate in the second quarter was 74.9%, higher than the 73.6% in the first quarter and the 74.5% in the same period last year. The capacity utilization rates in the automotive manufacturing industry and the electrical machinery and equipment manufacturing industry, which had relatively prominent supply-demand imbalances, also rebounded from 64.9% and 72.7% in the first quarter to 73% and 74.7% in the second quarter, respectively. The improvement in supply-demand contradictions will promote the rebound of prices and the improvement of corporate profits.

Fourthly, the industrial transformation and upgrading have accelerated. In the first half of the year, the added value of the equipment manufacturing industry grew by 7.8%, and the added value of the high-tech manufacturing industry grew by 8.7%, with growth rates that were 1.8 and 2.7 percentage points faster than the total scale above industry, respectively; the proportion of the added value of high-tech manufacturing industry in the added value of the scale above industry reached 15.8%, an increase of 0.6 percentage points from the first quarter. In the first half of the year, investment in high-tech manufacturing and high-tech services grew by 10.1% and 11.7%, respectively, significantly higher than the overall growth rate of fixed asset investment of 3.9%. The high growth in production and investment in high-tech industries has to some extent offset the drag on the economy caused by the continued downturn of traditional industries such as real estate.

Fifthly, the effects of policies to stabilize growth are gradually becoming apparent. First, under the stimulus of a new round of large-scale equipment renewal and the policy of replacing old consumer goods with new ones, the investment in equipment, tools, and instruments in the first half of the year increased by 17.3% year-on-year, driving the growth of fixed asset investment by 2.1 percentage points, with a contribution rate of 54.8%; the investment in technological transformation of the manufacturing industry grew by 10.0%, which is 0.5 percentage points higher than the investment in the manufacturing industry; as of 12:00 on June 25, the Ministry of Commerce's car replacement and renewal subsidy application platform had received about 113,000 applications for car scrapping and renewal subsidies. Second, under the influence of the "517 real estate new policy", the sales area of real estate in June and the real estate investment year-on-year were -14.5% and -10.1%, respectively, with the decline narrowing by 6.2 and 0.9 percentage points compared to May; in the first half of the year, the "three major projects" of affordable housing construction, "emergency and two-use" public infrastructure construction, and urban village renovation drove the real estate development investment by 0.9 percentage points. Third, the additional issuance of government bonds last year provided project and financial guarantees for infrastructure investment, and the 15,000 additional government bond projects in 2023 have all started construction, with the investment in the railway transportation industry growing by 18.5% in the first half of the year, and the investment in the water conservancy management industry growing by 27.4%.

At the same time, it should also be seen that the current external environment is complex, the domestic effective demand is still insufficient, and the foundation for the economic rebound and improvement still needs to be consolidated, which is reflected in the decline of the growth rate in the second quarter. The supply and demand data in the second quarter weakened, and the manufacturing PMI fell below the boom and bust line, with the total retail sales of consumer goods and the total fixed asset investment year-on-year decreasing from 4.7% and 4.5% in the first quarter to 3.7% and 3.9% in the first half of the year.

II. How to understand the decline of the economic growth rate in the second quarter?

The GDP in the second quarter grew by 4.7% year-on-year, a decline of 0.6 percentage points from the 5.3% in the first quarter, and lower than the market expectation of 5.1%.

On the one hand, the economic growth rate in the second quarter was affected by temporary factors such as extreme weather and data "squeezing water".

First, the disturbance of extreme weather such as floods in the south and droughts in the north. Since April, the southern regions have been prone to floods and geological disasters, while the northern regions have experienced local high temperatures and droughts, affecting the normal production and life order.

Second, the financial data "squeezing water", and the financial industry added value "de-bloating". Previously, there was an impulse to rush the scale of deposits and loans and to increase the financial industry added value in some places; but since April, financial regulators have banned banks from "manual interest supplementation", and statistical departments have optimized and adjusted the accounting method of the financial industry added value, which has significantly reduced the behavior of capital arbitrage and the pressure of high deposits and loans, and the loan growth rate has continued to decline, lowering the growth rate of the financial industry added value. The People's Bank of China's official media "Financial Times" stated: "The optimization of the accounting method was understood and familiarized by all parties in April this year, and it is expected that the disturbance to the growth of money and credit may be concentrated in the second quarter, and will continue to have an impact in the second half of the year."

On the other hand, the main reason for the decline in the economic growth rate is the insufficient domestic effective demand.Firstly, there is a trend towards frugality and risk aversion in residential consumption and home purchases. In terms of total volume, the proportion of per capita consumption expenditure to disposable income in the second quarter was 68.5%, still lower than the 70.5% in the same period of 2019; the year-on-year growth of retail sales of consumer goods in the first half of the year was 3.7%, lower than the 4.7% in the first quarter. Structurally, residents have reduced unnecessary consumer goods spending and increased spending on services that provide immediate satisfaction, such as tourism and performances, similar to the "lipstick effect", with the year-on-year growth of catering income and retail sales of goods in June being 5.4% and 1.5%, respectively. Despite a slight boost in the real estate market in June under the "517 real estate new policy", the year-on-year growth of real estate sales area was still at a low level of -14.5%.

Secondly, there is still a need to boost business investment confidence. The rebound in exports and the high increase in equipment renewal investment only play a supporting role and are not sufficient to fully offset the sluggish demand in other areas; the Producer Price Index (PPI) is still in negative growth, and the growth rate of corporate revenue and profits is relatively low; some industries are facing supply and demand imbalances, leading to a slowdown in investment growth. The cumulative year-on-year growth of manufacturing investment has continued to decline from 9.9% in the first quarter to 9.5% in the first half of the year.

Thirdly, the tight balance of local finance restricts local infrastructure investment. Affected by factors such as low nominal economic growth, a sluggish real estate market, government tax cuts and fee reductions, and local debt management, industries that rely more on local finance, such as public facility management and road transportation, have seen a downturn in investment, with a cumulative year-on-year decline of -4.5% and -1% in the first half of the year, respectively.

In the second half of the year, the pressure to maintain growth may increase further, and it is necessary to consider increasing the fiscal deficit to further raise the growth rate of fiscal expenditure, lowering reserve requirements and interest rates, and increasing the incremental demand for real estate in first-tier cities.

The annual economic growth target set at the beginning of the year was "around 5%", and the GDP growth rate in the first half of the year was 5%. The weight of GDP in the second half of the year is greater (53.4%), so the year-on-year growth rate still needs to be maintained at around 5%. Considering the decline in economic growth in the second quarter and the increase in the base period in the second half of the year compared to the second quarter (the GDP in the second, third, and fourth quarters of 2023 grew by 19.2%, 20.2%, and 20.1% respectively compared to the same period in 2019), the pressure to maintain growth in the second half of the year may increase further.

The uncertainty in the economic situation in the second half of the year mainly lies in four aspects, with the key being real estate and local finance: First, in the real estate sector, after the continuous implementation of stable real estate policies and a long period of adjustment, whether the real estate market can stabilize and rebound, and the extent of the stabilization; Second, in terms of local finance and infrastructure investment, whether the accelerated issuance of local special bonds and ultra-long-term special treasury bonds can form physical work volume smoothly, and whether the tight balance of local finance caused by the decline in land finance can promote the rebound of corresponding investments; Third, in terms of external demand, whether trade frictions and geopolitical risks will have an adverse impact on exports; Fourth, in terms of market entities and expectations, whether the next phase of macroeconomic policies and reform measures can effectively boost the confidence of residents and businesses.

In the short term, it is necessary to increase the intensity of counter-cyclical adjustments and expand total demand. Fiscal policy should increase its intensity, take the lead, issue more government bonds, ensure the necessary expenditure strength, and optimize the "debt reduction" policy to promote local governments to return to normal from emergency status. Monetary policy should have more room for maneuver, increase support for the real economy, crack down on banks' illegal high-interest deposit-raising practices, support small and medium-sized banks in supplementing capital, appropriately increase the flexibility of the renminbi exchange rate to curb arbitrage transactions, and further reduce the interest rates on existing mortgages, etc. Continue to optimize real estate policies and quickly reverse the downward expectation of real estate prices, relax purchase restrictions, increase the purchase quota for first-tier cities, shift from optimizing the stock to releasing incremental demand; increase the government's purchase and storage efforts and solve some local funding issues centrally; increase the supply of high-quality commercial housing in core areas.

In the medium and long term, it is necessary to promote systemic and institutional reforms and mobilize the enthusiasm of four major entities: local governments, entrepreneurs, residents, and scientists. First, promote a new round of fiscal and tax system reforms to fundamentally solve the current tight balance of fiscal operations and local debt issues, and stimulate the enthusiasm and vitality of local governments. Second, build a high-level socialist market economic system to boost the confidence of entrepreneurs from four aspects: policy stability, system completeness, legal implementation, and theoretical breakthroughs. Third, promote reforms in income distribution, household registration system, and other aspects, improve the level of medical care, education, and elderly care, resolve the long-term problem of low resident consumption rate, and mobilize the enthusiasm of residents. Fourth, promote the reform of the scientific and technological innovation system, implement equity incentives, promote the integration of industry, academia, and research, and to a greater extent, increase the proportion of human capital participation in income distribution, and mobilize the enthusiasm of scientists.