Economy, policy
The volume-price divergence in the May economic data converged. According to April-May data, GDP in the second quarter may be around 5.0% year-on-year, a moderate slowdown from the first quarter. The surveyed unemployment rate in 31 cities fell to a low of 4.9%, the lowest level since February 2019, but the CPI response was muted. Since 2020, the flattening of the continental Phillips curve may be related to the increase in flexible employment. From the perspective of the number of employees participating in medical insurance, the proportion of flexible employment insurance participants was 13.4% in 2019 and 14.6% in 2022.
The exchange of stocks and bonds, which have been hovering near the key point for a long time, seems to have changed in June, and the signals behind it are worth paying attention to.
In June, Pan Gongsheng, governor of the People's Bank of China, said: "It is necessary to take the financial aggregate more as an observative, reference and expected index, and pay more attention to the role of interest rate regulation." "The switch of the monetary policy framework from volume to price may be reflected at two levels: first, in terms of monetary policy operation, with the dilution of the quantitative target, the price tool needs to play a more important role, and the price space is expected to open. After August 2023, CNH Hibor increased its volatility overnight, but since May 2024, its volatility has decreased and the pivot has shifted downward. Under the premise of basic stability, the flexibility of the RMB exchange rate may be improved, opening up space for the use of domestic interest rate tools. At the same time, after the end of this round of real estate policy observation period, it may be necessary to further reduce mortgage interest rates.
Second, in terms of the interest rate formation mechanism, at the short end, the price signal is clear. The spread between NCD and MLF is influenced by fundamentals and credit demand. When credit growth shifts from supply constraints to demand constraints, the guiding role of MLF in NCD interest rates may be weakened. Therefore, using the short-term operating interest rate as the main policy rate and diluting the color of the MLF policy rate will help to send a clearer policy signal to the market. In the long end, the LPR may usher in a second reform. If the MLF's policy rate color fades, the LPR quotation mechanism may need to be adjusted. The US LPR quotation is directly based on the federal funds rate plus points, and perhaps the mainland LPR quotation can also be formed on the basis of the short-end interest rate in the future. At the same time, if the deviation of LPR quotations is assessed, it will help to optimize the quality of quotations, but in the context of narrowing interest rate spreads, it may be necessary to take advantage of opportunities to steadily advance together with measures such as reducing deposit costs.
The volume-price divergence in May's economic data converged: industrial production slowed to 5.6% YoY, while PPI narrowed to 1.4% YoY, and CPI was unchanged YoY from April. Based on this estimate, the year-on-year GDP growth rate in the second quarter will be about 5.0%, which is slower than the first quarter. The impact of stopping the "manual interest rate supplement" continued to ferment, and credit and monetary growth slowed down, but the acceleration of government bond issuance supported the year-on-year growth of social finance. It is worth noting that the exchange rate of stocks and bonds, which have been around the key point for a long time, seems to have changed in June: the offshore RMB exchange rate was close to 7.3 at one point, the interest rate on 30-year treasury bonds fell below 2.5%, and the stock market also saw a round of adjustment. How to understand the current changes in the economy, policy and market environment? This article will discuss this.
1. Economy: A flat Phillips curve
The volume-price divergence in the May economic data converged. In the case of improved employment, the CPI response was muted. Structural changes in employment may be one of the reasons for the flattening of the Phillips curve.
From the perspective of fixed asset investment, the year-on-year decline in fixed asset investment in May was moderate, and equipment renewal was still the main force supporting investment growth. In May, equipment investment increased by 17.5% year-on-year, much higher than the 3.8% of construction investment and -2.0% of other expenses. The growth rate of fixed asset investment is likely to be stable or slow. On the one hand, since 2024, the source of funds for fixed asset investment has declined year-on-year. In May, the cumulative source of funds for fixed asset investment fell by 5.6% year-on-year, indicating that the financial support for fixed asset investment needs to be strengthened. On the other hand, the cumulative year-on-year decline in the planned investment of newly started projects in May narrowed significantly, but it was still in a state of negative growth.
From the perspective of exports, in the context of the pause in interest rate hikes in the United States and the reduction of interest rates in the euro area, overseas monetary conditions tend to be loose, and the global manufacturing boom will remain for a period of time. At the same time, the "rush to export" behavior before the US tariffs landed also gave a certain boost to the export reading in the short term.
From the perspective of consumption, the dislocation of the May Day holiday and the promotion of online shopping boosted the reading of the social zero, and the social zero rebounded year-on-year in May. In May, the company showed the characteristics of "exchanging price for volume". Although online shopping in May increased by 12.9% year-on-year, the CPI for household appliances and communication tools fell by 0.9 and 2.5 percentage points year-on-year, respectively. In the first five months of 2024, the cumulative growth rate of social zero was 4.1% year-on-year, a decrease of 3.9 percentage points compared with the whole year of 2019. From the perspective of volume and price dismantling, compared with before the epidemic, the drag of volume and price on social zero is about four or six open. RPI data to measure retail prices from 2023 is no longer released, but except for 2019, when pig prices fluctuated sharply, the trend of RPI and consumer CPI is more consistent at other times. If we estimate the growth of the volume of social zero in 2019 and the first five months of 2024 by the difference between the year-on-year growth of social zero and the year-on-year RPI in 2019, and the difference between the year-on-year growth of social zero and the year-on-year CPI of consumer goods in the first five months of 2024, we can find that for the slowdown in the growth rate of social zero, the volume factor can explain about 39%, and the price factor can explain about 61%.
From the perspective of prices, the CPI was stable year-on-year in May, and the core CPI was 0.6% year-on-year, which was also unchanged from the previous month. However, the performance of the unemployment rate and prices diverged, with the surveyed unemployment rate in 31 cities falling to a low of 4.9%, the lowest level since February 2019. In fact, since 2020, the continental Phillips curve has flattened, and the impact of the unemployment rate on the core CPI has decreased significantly. This phenomenon may be related to the current structural changes in the job market. From the perspective of the number of employees participating in medical insurance, in 2019, the three categories of insured persons (including in-service employees and retirees) such as enterprises, government institutions, and flexible employment accounted for 67.6%, 18.9% and 13.4% of the total number of insured people, respectively. In 2022, the number of insured persons (including active employees and retirees) of enterprises, government institutions, flexible employment and other personnel accounted for 67.3%, 18.1% and 14.6% of the total number of employees, respectively. It can be seen that the proportion of flexible employment has increased after the epidemic. Of course, the participation rate of flexible workers may be lower, and this percentage may be underestimated. Since the income expectations of those in flexible employment may be relatively volatile, the increase in the share of flexible employment may have weakened the impact of the unemployment rate on prices.
Second, the policy: the dilution of quantity, the choice of price
After the cessation of the "manual interest supplement", the growth rate of money and credit both declined. In June, Pan Gongsheng, governor of the People's Bank of China, proposed in a keynote speech at the 15th Lujiazui Forum: "In the future, we can continue to optimize the intermediate variables of monetary policy and gradually dilute the focus on quantitative targets." When the growth of money and credit has changed from a supply constraint to a demand constraint, if the focus of attention is still on the growth of quantity, or even if there is a 'scale complex,' it is obviously contrary to the law of economic operation. It is necessary to regard the financial aggregate more as an observative, reference, and expected index, and pay more attention to the role of interest rate regulation and control. "The switch of the monetary policy framework from volume to price may be reflected from two levels: first, in terms of monetary policy operation, due to the slowdown in the growth of the quantity of money and credit and the dilution of the quantitative target, the price tool needs to play a more important role, and the price space is expected to be opened; Second, in terms of the interest rate formation mechanism, the interest rate system may need to be further straightened out.
From the perspective of monetary policy operation, the price space is expected to open. First, on the basis of maintaining basic stability, the flexibility of the RMB exchange rate may be enhanced. Since August 2023, in order to guide the RMB exchange rate expectations, the pivot and volatility of CNH Hibor have increased significantly, and since May 2024, the pivot and volatility of CNH Hibor have fallen again. This could mean that the exchange rate could become more resilient, creating more room for the use of domestic interest rate instruments. On the one hand, the volatility of the 10-year U.S. Treasury interest rate has fallen since May, and the external pressure has eased. On the other hand, despite the upward trend in the exchange rate of the US dollar against the RMB, the exchange rate level of the RMB against a basket of currencies is relatively stable from the perspective of the CFETS RMB exchange rate index. In the context of diversification of trading partners, the importance of the RMB to the level of the exchange rate of a basket of currencies will gradually increase.
Second, in the future, it is necessary to use price tools to deepen the regulation and control of the real estate market. Market sentiment was boosted by the intensive release of measures to optimize the real estate market in May, and the housing price index in first-tier cities showed a modest improvement. After the end of this round of policy observation period, it may be necessary to continue to introduce more policies to stabilize the expectations of the real estate market. In addition to the implementation of guaranteed delivery and orderly promotion of collection and storage, as the purchase and loan restrictions in most cities have been relatively relaxed, it may be necessary to further reduce the mortgage interest rate to reduce the interest payment burden of home buyers.
From the perspective of the interest rate formation mechanism, in the short term, Pan Gongsheng, governor of the People's Bank of China in June, mentioned: "In the future, we can consider clearly taking a short-term operating interest rate of the central bank as the main policy rate. The interest rates of other maturities monetary policy instruments can dilute the color of the policy rate and gradually straighten out the transmission relationship from short to long. "Since 2024, DR007 has fluctuated slightly around the 7-day reverse repo rate most of the time, but the difference between the 1-year MLF and the 1-year NCD rate of the stock bank is large. According to the pricing model published in our May report, "Quantitative Estimation of the Spread Between NCD and MLF", the spread between the NCD and MLF is not only affected by the funding side, but also by fundamentals and credit demand. When the growth of money and credit has changed from supply constraint to demand constraint, the guiding role of MLF in the NCD interest rate of the same maturity may be weakened. Therefore, taking the short-term operating interest rate as the main policy interest rate and diluting the color of the MLF policy interest rate will help to send a clearer signal to the market about the target of interest rate control.
In terms of the long end, the LPR may usher in a second reform. On the one hand, if the MLF's policy rate color fades, the current MLF-based LPR quotation mechanism may need to be adjusted. The US LPR quotation is directly based on the federal funds rate plus points, and perhaps the mainland LPR quotation can also be formed on the basis of the short-end interest rate in the future, so as to smooth the transmission of interest rate policy. On the other hand, Governor Pan mentioned: "At the same time, we will continue to reform and improve the loan prime rate (LPR), and focus on improving the quality of LPR quotations to more truly reflect the level of interest rates in the loan market in response to the problem that some prime interest rates deviate significantly from the actual best customer interest rate." "At the beginning of the launch of the LPR in 2019, the proportion of LPR reduced point loans was less than 20%, and by March 2024, the proportion of LPR point reduction loans has exceeded 40%, which shows that the LPR has deviated from the actual best customer interest rate. If the deviation of LPR quotation is assessed, the linkage between incremental loans and existing loan interest rates can be strengthened, but it will pose a certain challenge to the interest rate spread of commercial banks. In May 2024, the General Office of the National Development and Reform Commission and others issued the Notice on Doing a Good Job in the Key Work of Cost Reduction in 2024, which requires that "on the basis of maintaining the basic stability of the net interest margin of commercial banks, promote the steady and moderate decline of social comprehensive financing costs." "Therefore, the reform of the LPR is likely to be gradual.
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