CSC's Zhou Junzhi: Two pricing strategies after weakening demand

Key Points

The economic data for May depicts a weakening trend in both domestic and external demand. The internal demand issue lies in the high inventory of real estate leading to a decline in investment, while the external demand aspect is a temporary peak in exports. With the slowdown in the slope of both domestic and external demand, production also shows a weakening trend.

The May economic data cross-validates with exports and inflation, with a clear downward trend in consumption, consistent with the weakening core inflation signal; there are also short-term signs of a peak in manufacturing investment, consistent with the signal of a month-on-month cooling in exports in May, and industrial production is also weakening in sync.

The macro changes in May correspond to two pricing clues: firstly, the current high inventory of real estate points to the country still being in a trend of lowering interest rates; secondly, since mid-May, there has been a cooling down in the "exporting overseas" narrative and upstream resource stories, with the stock market trading once again focusing on technology.

Events & Comments

On June 17th, the National Bureau of Statistics released the economic data for May. The year-on-year growth rate of social retail sales in May was 3.7%, the year-to-date growth rate of fixed asset investment was 4.0%, and the year-on-year growth rate of industrial added value was 5.6%.

The May economic data was slightly below market expectations, reflecting the structural characteristics of simultaneous weakening in domestic and external demand.

I. The information reflected in the May economic data is that high inventory is leading to a continued bottoming out of real estate investment.

The main anchor of domestic demand is mainly focused on real estate, with real estate investment in May continuing to decline, and it is still uncertain whether real estate has bottomed out and rebounded.

The main contradiction in real estate at present is the high inventory, with readings at various stages being weak.

From January to May, the growth rate of real estate investment declined to -10.1%, a decrease of 0.3 percentage points from January to April. New construction, construction, and completion areas decreased by 24.2%, 11.6%, and 20.1% respectively. Sales significantly declined, with new home sales from January to May dropping by 20.3% year-on-year. At the same time, the area of unsold commercial housing increased by 15.8% year-on-year, and the pressure to reduce inventory of commercial housing has not eased.

Overall, there was not much change in infrastructure and consumption, but the information presented indicates that sectors of domestic demand outside of real estate are also weak.

Infrastructure investment slightly declined, with the growth rate of infrastructure investment from January to May at 5.7%, a decrease of 0.3 percentage points from January to April. Due to the slow issuance speed of special national bonds and special bonds in the first quarter, the progress of funds in place was lower than expected at the beginning of the year, and the growth rate of infrastructure investment fell within expectations. Social retail sales in May increased to 3.7%, up by 1.4 percentage points from the previous month; the three-year compound growth rate slightly improved.

II. The May economic data, cross-validated with exports and inflation, showed a marginal weakening compared to April.

The clear downward trend in consumption is consistent with the weakening core inflation signal.

1. Apart from automobiles, the growth rate of social retail sales was 4.7%, 1 percentage point higher than the overall growth rate; 2) The growth rate of physical goods online retail sales from January to May was 11.5%. Among retail goods, the growth rates of sports and entertainment products, household appliances, and communication equipment increased compared to April, at 20.2%, 12.9%, and 16.6% respectively; in addition, grains and oils, beverages, and tobacco and alcohol maintained high growth rates, at 9.3%, 6.5%, and 7.4% respectively Manufacturing investment seems to have peaked in the short term, consistent with the signal of a month-on-month cooling in May exports.

From January to May, manufacturing investment grew by 9.6%, a decrease of 0.1 percentage points from the previous month, with no continued upward trend. In May, the export growth rate exceeded market expectations, with a year-on-year increase of 7.6%, but the base effect from the same period last year was significant, leading to a decline in the month-on-month export growth rate.

With domestic demand falling short of expectations and external demand peaking, production growth slowed by 0.7 percentage points to 6.0%. By industry, the production of chemicals, non-ferrous metals, automobiles, and computer communication electronics remained strong. However, the current major trend facing domestic automobiles is expanding quantity while reducing prices, which is also evident in the sub-items of automobiles in the Producer Price Index (PPI).

Macro changes in March and May correspond to two pricing clues, with interest rates trending downward in the bond market and increased attention on the technology sector in the stock market.

After the introduction of real estate policies in May, market risk appetite experienced a temporary recovery. However, real data shows that the effects of domestic demand policies are still not significant. Coupled with the cooling of exports from January to April this year and the marginal weakening of the US economic momentum in May, we ultimately saw a weakening macroeconomic environment in terms of both domestic and external demand in May.

With the current high inventory levels in real estate, China is still in a trend of lowering interest rates.

Whether the bond bull market this year will end depends on a fundamental question: can real estate hit bottom and rebound, and can credit return to expansion?

Currently, there is a lack of effective demand in the Chinese real estate market. What residents lack is purchasing power. In other words, real estate is relatively expensive for residents, as evidenced by the high housing-to-income ratio in China. Unlike ordinary consumer goods, real estate naturally carries leverage. Therefore, real estate actually has two prices: one is the asset price, namely housing prices. The other price is the cost of leverage, namely mortgage interest rates. The best choice to prevent excessive decline in housing prices while stimulating effective purchasing power among residents is to lower mortgage interest rates. From this perspective, the bond market still maintains a bullish tone in the overall direction.

Since mid-May, the narrative of "exporting overseas" has cooled down. The stock market has once again focused on the technology sector.

Since the beginning of the year, driven by "going overseas" and "exporting," sectors such as automobiles and home appliances have seen high trading activity, with dividend sectors benefiting from the decline in national bond rates and continuously increasing valuations. Since mid-May, the "exporting overseas" sector has experienced a pullback, and the market has begun to look for new pricing focal points.

At the end of May, the third phase of the domestic large fund was established with a registered capital exceeding 300 billion yuan. At the same time, there are signs of recovery in the global consumer electronics cycle, and the market has started trading with a focus on "Cotech estimates" dominated by semiconductors.

The economy is still in a weak state in the third quarter, and it is expected that the direction of the "Third Plenum" reform will be traded in the future.

In the short term, exports are expected to peak, with weak domestic demand and weakening external demand in the third quarter. The slope of fundamental repair will further slow down, leaving room for bonds. In the future, attention still needs to be paid to two aspects: (1) the strong US dollar suppressing domestic monetary policy; (2) whether the Third Plenum policy will contain unexpected content

Authors: Zhou Junzhi, Wang Dalin, Source: CSC Research Macro Team, Original Title: "Two Pricing Guidelines After Weak Demand [CSC Macro·Zhou Junzhi Team]"

Zhou Junzhi, Practicing Certificate Number: S1440524020001

Wang Dalin, Practicing Certificate Number: S1440520110002