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Since the State Council issued 33 measures to stabilize growth at the end of May 2022, signs of accelerated recovery of China’s economy have increased significantly. In June, China’s service industry PMI rebounded to the highest level in nearly a year. High-frequency indicators such as real estate sales, automobile tire operating rate, and cement mill operation rate in 30 large and medium-sized cities were all close to the same period last year. Container foreign trade throughput from eight hub ports From the point of view, the resilience of exports has continued. On June 28, the State Council issued the “New Coronavirus Pneumonia Prevention and Control Plan (Ninth Edition)”, which shortened the isolation time of risk personnel from “14+7” to “7+3” days; the next day, the Ministry of Industry and Information Technology announced the cancellation of the communication itinerary card The “asterisk” mark of , has taken a big step in coordinating epidemic prevention and control and economic growth, making the market more optimistic about the prospect of economic recovery in the third quarter.
Against this backdrop, the A-share market accelerated in June, with the Shanghai Composite Index rising by 6.7% and the ChiNext Index rising by 14.6%, basically recovering the decline since March this year; while the 10-year treasury bond yield returned to above 2.8%. It is the upper edge of narrow range fluctuations this year. The recovery of market risk appetite, in addition to reflecting the optimistic expectation of economic recovery, also reflects the expectation that monetary policy will remain loose. In particular, since late June, the yield of U.S. Treasury bonds has fallen from a high of 3.43% to 2.88%, the price of international commodities has plummeted, and the exchange rate of the dollar against the RMB has stabilized around 6.7, which means that the constraints on domestic monetary policy tend to weaken. .
We believe that the internal and external environment facing the capital market in the second half of the year tends to improve in general. With the transition from “stagflation” transactions to “recession” transactions overseas, China’s weaker economic growth compared with overseas countries in the first half of the year, the obstruction of monetary easing, and the sharp depreciation of the RMB exchange rate are expected to improve, which will help the stock market to further rebound and the bond market. It is also possible to make a dip in the layout after adjustment. However, there are still three major issues worthy of attention in the second half of the year, which may have an impact on monetary easing, economic growth, and the formation of risk appetite. It is necessary to pay attention to related fields.
Concern 1: There is a risk of inflation
Our basic forecast for the inflation situation in the second half of the year is that the PPI will further fall from 6.1% in June to around 0% year-on-year; the CPI will rise from 2.5% in June to 3%-4% year-on-year. Monetary policy constraints are not strong.
However, in the second half of the year, inflation is likely to “emerge” from three aspects, causing the CPI to surge to 4% and the core CPI to rise. Monetary policy is not without constraints:
First, since late June, pork prices have risen rapidly, causing the market to worry about inflation. At present, the upward trajectory of pig prices has not deviated from our previous expectations, which is in line with the one-year leadership of the number of breeding sows on pork prices. Considering that the production capacity reduction phase of this round of pig cycle starts in July 2021 and lasts for only 10 months until April 2022, the reduction of reproductive sows is about 8.5%, and the degree of reduction is much lower than the previous two rounds. Pig cycle (19 months of detoxification in the last round, a decrease of about 28.4%; 34 months of detoxification in the last round, a decrease of about 19.1%). Therefore, the increase in pork prices in the second half of the year should be controllable. Neutral estimates, the average pig price in 22 provinces and cities at the end of the year rose from 22 yuan/kg in May to 30 yuan/kg, and the year-on-year contribution of pig prices to the CPI rose from -0.08% in June to a maximum of 0.45% in October, which is the second half of the year. The main driving force of CPI rise. However, if the actual detoxification of fertile sows is underestimated, resulting in a rapid rise in pork prices, reaching 35 yuan/kg at the end of the year, the pig price will have an additional pull of about 0.2 percentage points on the CPI year-on-year.
Second, after crude oil prices fell in June and July, there is a possibility of another rise in the third quarter, forming a “lard resonance” situation. If the price of the ICE Brent crude oil futures forward contract on July 12 is used as a neutral estimate, the crude oil price will moderately fall from the current US$99/barrel to about US$89/barrel by the end of the year (the average price of crude oil in the second half of the year is about US$93/barrel). ), then the year-on-year growth rate of crude oil prices will drop significantly in the second half of the year, helping to quell the impact of rising pig prices (that is, the “lard offset” situation). However, considering that there is no obvious sign of easing the current global crude oil supply shortage, and the relaxation of epidemic prevention and control in China in the third quarter may bring a significant increase to the peak global travel season, exacerbating the crude oil supply gap. If the international oil price returns to the range of 120-130 US dollars per barrel in the second half of the year, the year-on-year growth rate of oil prices will remain high, thus forming a resonance with the price of pigs.
Third, the continuous transmission of PPI to CPI may drive the core CPI to rise, which will have a stronger impact on monetary policy. Looking back on the history since 2011, my country’s monetary policy operations may pay more attention to the changes in the core CPI: the previous RRR cuts and interest rate cuts have all occurred in the context of the core CPI falling or running smoothly. At the high point and in the second half of 2021, when the PPI surged to a high of 13.5% year-on-year, it did not affect the central bank’s RRR cuts and interest rate cuts. The current core CPI is at 0.9% year-on-year, which is still far from the sensitive level of 2%. Considering that the social financing growth rate has a 9-month lead over the core CPI, from the low level of social financing growth and stabilization, the second half of the year The neutral expectation of the core CPI is to be stable. The risk is that with the further transmission of PPI to CPI in the second half of the year (since November 2021, PPI has fallen from the highest point year-on-year, but the PPI sub-item for living materials has further increased year-on-year, and the signs of price transmission have increased significantly), the core CPI may increase year-on-year. The magnitude of the rise. The combination of “lard resonance” and rising core CPI will hinder monetary easing.
Concern 2: There is a risk of shrinking external demand
After the impact of the domestic epidemic in April, China’s exports have shown resilience again. After total exports in May exceeded expectations by 16.9% year-on-year, the export new orders index in the manufacturing PMI rebounded to a new high since May 2021 in June, while the overall new orders index has not exceeded the high set in February this year; June In the middle of the year, the foreign trade container throughput of the eight major hub ports hit a new high since March this year.
At present, China’s export market share still maintains an advantage. In order to exclude the impact of energy and other bulk commodity exports, we use the ratio of China’s total exports to major manufacturing exporting regions (the data caliber is unified: CIF data from IMF trade direction statistics) to measure China’s export market share. . It can be seen that since the new crown epidemic, China’s export value compared with the EU, the United States, Mexico, Canada, Japan and South Korea has obviously improved to a higher level, and as of January-March 2022, China’s export value relative to the EU, Japan and South Korea has further improved. momentum. At the same time, the export industry transfer regions represented by ASEAN, India, and Taiwan, China, have indeed shown a trend of occupying the export market share of mainland China since 2021. But overall, China’s export competitiveness has not been greatly affected due to the generally obvious decline in the export market share of developed countries.
However, the contractionary pressure of external demand facing China’s exports may be highlighted sooner. On the one hand, due to rising commodity prices, the contribution of price factors to global and Chinese exports has been high. The global import volume index released by Statistics Netherlands in April 2022 only increased by 3.8% year-on-year, while the import unit value index increased by 12.9% year-on-year. The difference between the two has reached a new high since 2012. Since 2022, the price factor has contributed most of the year-on-year growth rate of China’s exports, and the pull of exports to China’s real economic growth has weakened significantly. On the other hand, import demand from Europe and the United States, which are the main sources of external demand, has been in a downward channel. Historically, U.S. and European manufacturing PMIs have had good year-over-year correlations with Chinese exports. Taking the average of the US ISM manufacturing PMI and the euro zone manufacturing PMI, it leads China’s exports by about 2 months year-on-year. After the Russian-Ukrainian conflict in March this year, European inflation intensified, the Federal Reserve accelerated its tightening, and European and American manufacturing PMIs began to decline at an accelerated pace. Due to the intractable energy supply gap and the risk of the United States falling into a “wage-price” spiral, the process of suppressing inflation by the European and American central banks is more likely to pay the price of economic recession. After the release of the U.S. ISM manufacturing PMI on July 1, the Atlanta Fed’s GDPNow model’s forecast of the U.S. real GDP in the second quarter was lowered to -2.1%. The lowest since the month), the dollar soared, the U.S. bond interest rate fell, the commodity market fell sharply, and the “recession trade” was quickly staged.
Figure 1 The manufacturing boom in Europe and the United States has a year-on-year lead of about 2 months in exports to China
Therefore, in the second half of the year, China’s economy will not only face the spillover impact of the rapid rate hike by the Federal Reserve, but also the external demand shock caused by the recession of the European and American economies. Since June, international bulk commodity prices have fallen sharply, and the domestic South China Industrial Products Index has fallen by 11.8%. This is quite beneficial to the improvement of the profitability of the midstream and downstream manufacturing industries. In fact, from the profit data of industrial enterprises, the profits of the midstream manufacturing industry showed a relatively obvious month-on-month improvement in May, which may be due to the weakening of logistics industry chain constraints and exports. End demand recovers quickly. After cost pressures eased significantly in June, earnings in the midstream industry may see a more significant improvement. In the A-share market, the machinery and equipment sector has begun to outperform the broader market since June, reflecting expectations for improved midstream earnings. However, a hidden concern is the subsequent decline in export momentum. Most midstream equipment manufacturing industries and some downstream labor-intensive industries have a relatively high export share of revenue. If the subsequent external demand is significantly weakened, it may offset the positive impact of easing cost pressures. The industry’s profit improvement is weak.
Focus 3: “European Debt Crisis” Risk Reappears
Europe is the hardest hit by the Russian-Ukrainian conflict. Due to the high degree of external dependence on energy and food, the surge in oil and food prices has brought stronger imported inflation pressures in Europe, which in turn triggered the European Central Bank to announce that it would suspend bond purchases in July and start raising interest rates for the first time since 2011. High inflation and tightening monetary policy have revived worries about the “European debt crisis” in 2010: From June 2022 to the 16th, the 10-year bond interest rates of Germany, France, Spain, Italy and Greece have all risen by 61%. -72BP, and the 10-year bond interest rates of Italy and Greece once exceeded the 4% warning level. On July 13, the exchange rate of the euro against the US dollar fell to parity, setting a new low in nearly 20 years.
Figure 2 Unlike the European debt crisis in 2010, which started in individual fragile countries, interest rates in the euro zone countries have risen synchronously since the beginning of this year
The main reasons why the risk of a re-emergence of the “European debt crisis” should not be underestimated are as follows: First, the government debt ratio of most euro zone member states has risen after the new crown epidemic (the average government debt ratio in the euro zone will reach 95.6% in 2021, which is higher than that in 2010). 83.9% in the last round of the European debt crisis in 2010, and most member countries’ debt ratios have increased compared with 2010), and the government debt risks of member countries such as Italy, Greece and Cyprus are particularly prominent. The European Central Bank stopped bond purchases and raised interest rates this round, putting more pressure on member governments to repay their debts. Second, this time the ECB’s tools to deal with the crisis will be greatly controlled by inflation control, and may eventually reflect the failure of its expected guidance (even if Lagarde says Whatever it takes again, the market may not buy it that much). Third, unlike the European debt crisis in 2010, which started in fragile countries such as Greece, this round of euro zone countries are generally impacted by high inflation, with interest rates rising at the same time, and the downward pressure on the economy increasing at the same time. In particular, Germany, the leader of the European economy, has weaker-than-average economic expectations (according to the forecast in the spring forecast report of the European Union Membership in May 2022, the GDP growth rate in Germany in 2022 is only 1.6%, while the average in the euro area is 2.7%. ).
Once the risk of “European debt crisis” reappears, it is bound to have an impact on China’s capital market. We can briefly review the capital market performance during the last round of European debt. The development of the European debt crisis set off three waves of shocks: the first wave was when Greece applied for aid from the EU and the IMF in April 2010; the second wave was the Greek sovereign debt crisis, which spread through the mutual holdings of national debts in the banking system of the euro area to the The five European pig countries”, the sovereign debt crisis in July 2011 expanded into a bank liquidity crisis; the third wave was in 2012, the crisis continued to spread to core countries such as Germany and France, and worries about the disintegration of the euro zone were rampant. During these three waves of shocks, U.S. stocks fell by a maximum of 15.5%, 17.8%, and 9.6%, respectively. During the same period, the 10-year U.S. bond yield dropped from 3.8% to about 1.5% step by step. The characteristics of “risk aversion” are prominent.
At this stage, China is in a period of overheating after the “four trillion” stimulus. In May 2010, under the catalyst of the “pig cycle”, China’s CPI exceeded 3% year-on-year. Monetary policy has begun to raise standards and interest rates, real estate regulation has continued to increase, and the supervision of financing platforms has begun to be strengthened. With the tightening of the policy mix, the downward pressure on China’s economy began to increase in the second half of 2011, and investment in infrastructure, exports, real estate, and manufacturing gradually declined. In the two years of tight currency, tight supervision, and economic downturn, China’s stock market has experienced a volatile decline and a “long bear” process, while the bond market has gone from a bull market (loose monetary conditions) to a bear market (tightening monetary conditions) And then to the bull market (economic downturn) switch. Although the operation of China’s capital market is dominated by the internal environment, the huge shock in the external market still has a significant impact on market risk appetite. During the first two waves of sharp adjustments in U.S. stocks during the European debt crisis, the Shanghai Composite Index fell sharply at the same time.
At present, the direction of China’s capital market’s “I-dominant” has not changed. If China’s economy can recover faster in the second half of the year, it will be the biggest supporting factor for the further rebound of the stock market. However, if there is a drastic adjustment in the external environment, combined with the pull-down of the overseas economic downturn on China’s foreign demand, it may have an impact on the risk appetite of the Chinese market and cause market volatility.
Note: This article only represents the author’s personal views
Editor of this article Xu [email protected]