CITIC Securities Co., Ltd.: What policies are on the way?

This article provides a detailed inventory of the current progress and implementation of the highly anticipated policies in four categories: expanding domestic demand, real estate, fiscal, and monetary policies.

In terms of expanding domestic demand policies, since July, after the "two new" policies were further strengthened, various provinces have introduced more substantial subsidy policies tailored to local conditions and significantly increased subsidy standards. It is expected to effectively support the growth rate of social retail sales (especially in household appliances) within the year. Regarding real estate policies, existing policies such as purchase restrictions, loan restrictions, and local government land reserves are steadily advancing. It is expected that there will be room for subsequent new mortgage loan interest rate reductions, repricing of existing mortgages, and the transition to mortgage loans in a market-oriented interest rate environment. In terms of fiscal policies, recent trends show marginal acceleration in public fiscal expenditure, progress in special bond issuances, and the use of special national bonds.

On the monetary policy front, the Fed's interest rate cut cycle is about to begin, the narrowing of the US-China interest rate differential, the decline in the US dollar index, may further open up space for the central bank to cut interest rates. In terms of macroeconomic operations, the August PMI data is significantly below historical seasonal average levels, indicating that further efforts are needed to strengthen the expansion of domestic demand policies. In July, tax revenue growth improved, but government fund revenue continued to decline; enterprise profit growth slightly improved under the drive of profit margin improvement, and both nominal and real inventories rebounded.

Next week, the focus will be on the US August non-farm payroll data and US manufacturing PMI data.

▍ Expanding Domestic Demand Policy: The "two new policies" are the most important lever for expanding domestic demand this year. Since July, with further strengthening of the policies, provinces have introduced more substantial subsidy policies tailored to local conditions and significantly increased subsidy standards. It is expected to provide effective support for the growth rate of social retail sales within the year, especially in household appliances.

Automobiles and household appliances account for a relatively high proportion of social retail sales, and the "trade-in old for new" policy for these two categories of goods is an important lever to stabilize consumption growth within the year. Against the backdrop of risk prevention in the real estate sector, the growth rate of residents' income in Q2 2024 has shown a significant decline. In order to further stabilize consumption growth and ensure the realization of domestic economic growth targets, in July, the National Development and Reform Commission, together with the Ministry of Finance, further strengthened the "two new policies." The "points of strength" mainly focus on three aspects: first, directly allocate ultra-long-term special national bond funds to support localities in enhancing their ability to trade in old products for new ones; second, significantly increase subsidies for scrapping and renewing automobiles; third, significantly increase the subsidy intensity for trading in old household appliances for new ones. Based on the unified deployment of the state, Beijing, Guangdong, Zhejiang, Hubei, Sichuan, Hunan, Yunnan, Hainan, and other regions have further strengthened their efforts in accordance with local conditions, such as adding support for individual passenger car replacement subsidies (subsidy scope much larger than scrapping and renewing), expanding the categories of household appliances eligible for trade-in subsidies, and other aspects. We expect that after policy strengthening, it can effectively support the growth rate of social retail sales within the year, especially for household appliances with higher purchase frequency and lower unit prices.

▍ Real Estate Policy: Existing policies such as purchase restrictions, loan restrictions, and local government land reserves are steadily advancing. It is expected that there will be room for subsequent new mortgage loan interest rate reductions, repricing of existing mortgages, and the transition to mortgage loans in a market-oriented interest rate environment.

After the April 30th Political Bureau meeting, various provinces have continuously strengthened and accelerated real estate policies. Currently, local existing policies mainly include optimizing purchase restrictions, optimizing loan restrictions, optimizing provident fund loan rates, optimizing household registration supporting policies, local government land reserves, and the exchange of old houses for new ones In terms of purchase restriction policies, except for the core areas of first-tier cities, purchase restriction policies in the real estate markets across the country have been basically fully relaxed (some cities in Tianjin and Hainan Province still have certain restrictions). In terms of local government land acquisition, according to Zhongzheng Research Institute, about 60 cities have expressed support for state-owned enterprises to acquire existing housing for commercial use, and first- and second-tier cities such as Shenzhen and Changsha have also followed suit. There is still considerable room for incremental policies. The real estate and banking teams of CITIC Securities believe that there is room for further lowering mortgage loan rates, repricing existing mortgages, and transitioning to mortgages in a market-oriented interest rate environment in the second half of the year.

▍ Fiscal Policy: Public fiscal expenditure speed, progress in special bond issuance, and the use of special national bonds are showing signs of marginal acceleration.

With fiscal revenue slowing down and the background of debt conversion to prevent risks, this year's progress in fiscal revenue and expenditure is significantly slower than in previous years. However, from a marginal perspective, public fiscal expenditure began to accelerate in July, possibly due to the increasing demand for stable growth at the policy level. This year, due to the relatively weak credit expansion in major economic provinces and stricter approval of special bond projects, the progress of special bond issuance has been significantly slower than in the same period of previous years. However, since August, the issuance of special bonds has accelerated significantly, with the remaining quota for special bond issuance for the whole year being around 1.3 trillion yuan. We expect that the issuance of special bonds in September and October will further accelerate. Long-term special national bonds totaling 250 billion yuan have been issued in the first half of the year, and we estimate that there are signs of marginal acceleration in the use of special national bonds in July.

▍ Monetary Policy: The Fed's interest rate cut cycle is about to begin, the narrowing of the US-China interest rate differential, the decline in the US dollar index may further open up room for the central bank to cut interest rates.

Since the beginning of this year, the People's Bank of China has cut interest rates twice and reserve requirements once, leading to a decrease in the real national bond yield from 3.98% at the beginning of the year to 2.09% in July. However, overall, there are mainly two factors constraining the central bank's room for interest rate cuts this year. First, in the context of the differentiation of the US-China interest rate differential and the continued strength of the US dollar, domestic interest rate cuts may bring potential pressure for RMB depreciation. Second, as bank net interest margins continue to decline, domestic interest rate cuts may bring potential risks of increased pressure on bank operations. With the recent progress in US inflation and signs of marginal weakening in economic data, Federal Reserve officials have significantly shifted to a dovish stance, the pressure for RMB depreciation has significantly eased, and we expect that this will further release the room for the People's Bank of China to cut interest rates. In addition, the recent repeated reductions in deposit rates on the liability side of banks are expected to play an important role in stabilizing net interest margins and may also open up room for further interest rate cuts by the central bank.

▍ Macroeconomic Operation: This week, the focus is on August PMI data, July fiscal revenue and expenditure data, and industrial enterprise profit data.

Affected by the traditional off-season of manufacturing, insufficient domestic effective demand, and the impact of high temperatures and heavy rainfall in some regions, the manufacturing PMI in August recorded 49.1%, a decrease of 0.3 percentage points from the previous month, continuing to be below the boom-bust line. The non-manufacturing business activity index remains above the critical point, and the gap between the construction industry PMI and the seasonal level has increased compared to the previous month. In terms of fiscal data, the decline in tax revenue in July narrowed, while government fund revenue and land transfer revenue continued to decline. In July, the profit growth of industrial enterprises slightly improved under the drive of profit margin improvement, with both nominal and real inventories rebounding Next week, pay close attention to the US August non-farm payroll data and US manufacturing PMI data.

▍ Risk Factors:

Unforeseen changes in the domestic macroeconomic situation, policy measures falling short of expectations, and unexpected overseas monetary policies