4.6% Expected vs. Actual

The "report card" released today for the third quarter indicates that the economy may have passed the annual cyclical low point. Especially against the backdrop of recent intensive policy measures, "economic stabilization and recovery in the fourth quarter is a high probability event." However, attention still needs to be paid to two major issues: First, in order to "strive to achieve" this year's economic targets, the growth rate in the fourth quarter needs to be maintained at above 5%, which requires efficient implementation of incremental policies in the short term; second, the GDP deflator has been negative for 6 consecutive quarters, only one quarter away from the record in 1998, so how to reverse the underlying expectations and confidence issues may be even more important.

A series of policies since "924" are gradually repairing the downward economic risks, but questions remain about whether the policy intensity is sufficient and how long the policy effects can last. Through the subtle changes in the economic structure in the third quarter, some clues about future policies may also be seen:

First, as the "finale" of China's economy this year, exports have started to slow down. The weakening overseas economic momentum is beginning to affect this year's pattern of "strong external and weak internal". This may also be an important catalyst for the shift in domestic policies.

Second, the industry has "caught its breath," but needs to be vigilant against the drag of exports. The impact of factors such as extreme weather and working days has dissipated, with industrial production accelerating in September and industrial capacity utilization further rising to 75.1%. However, given the close connection between industry and exports, caution is needed against the lagging effects of export slowdown.

Third, as long as there is policy support, residents still have consumption power. The third quarter saw support for trading in old for new goods, which supported a better-than-expected rebound in social retail sales, with the leveraged effect of fiscal policy on consumption being significant. The "positive feedback" of the data also points the way for future policy optimization.

Fourth, the short-term drag from real estate is difficult to reverse, and prices are more worth paying attention to. The price decline in 70 cities in September widened, and the cumulative year-on-year growth rate of completed real estate area continued to decline, with short-term policy impulses expected to be insufficient to completely reverse this situation. The core of the policy lies in controlling quantity to stabilize "prices," with the "quantity" in real estate possibly continuing to drag, while price stabilization is more worthy of attention.

Fifth, the positioning of infrastructure may be "stable." Narrow infrastructure growth further declined from 4.8% in the second quarter to 1.9% in the third quarter, highlighting the constraints of local finance and debt. With the efforts of debt-to-equity swaps and central planned investments in the fourth quarter, the growth rate is expected to rebound. However, the policy tone is to de-emphasize investment, so the rebound in infrastructure growth is limited.

Overall, the recent intensive policy measures may effectively alleviate economic pressure in the fourth quarter, but next year's economic work may require further cooperation from the central government. Achieving a growth rate of 4.7% in the fourth quarter would bring the full-year GDP growth rate to 4.8%, and with the current policy support, the return of the economy within the year is not difficult. However, looking ahead to next year, the current policy intensity may still be insufficient to correct the deviation between nominal and actual GDP growth rates, and the urgent need to accelerate the repair of the balance sheets of various departments by the fiscal sector. Combining the data from September, our evaluation of various sub-item data is as follows:**

Industrial Sector: There are many factors driving the acceleration of production in September. Whether looking at year-on-year or month-on-month comparisons, the progress of industrial production in September has shown an accelerating trend (year-on-year from 4.5% in August to 5.4% in September, month-on-month from 0.32% in August to 0.59% in September). There are many factors driving the acceleration of industrial production in September—from a year-on-year perspective, there are more working days in September this year compared to September 2023, allowing industrial production to "overtake on a curve"; from a month-on-month perspective, with the fading of seasonal disturbances such as weather and natural disasters, industrial production can also "get back on track".

Capacity utilization rate rebounded in the third quarter, while capacity continues to be cleared. It is worth noting that the industrial capacity utilization rate in the third quarter increased slightly from 74.9% in the second quarter to 75.1%, and manufacturers' production willingness may gradually recover in the future. However, the capacity utilization rate of some industries is still declining (especially in the upstream industries).

Manufacturing Sector: Continues to be the "ballast stone" of economic operation. With industrial enterprises entering the restocking cycle and the gradual resolution of previous overcapacity issues, the investment growth rate in the manufacturing sector in September further increased from 8.0% in August to 9.7%, with the accelerated investment mainly concentrated in downstream industries.

Looking ahead, we believe that there is a high probability of a slowdown in the investment growth rate in the manufacturing sector. First, the marginal weakening impact of exports may transmit to the manufacturing investment side in the future; second, the manufacturing investment dominated by private investment is greatly affected by private enterprise confidence, and the ongoing downward trend in the operating condition index of enterprises, as well as the manufacturing private investment situation that has not yet completely stabilized, all indicate that there is still a probability of the investment growth rate in the manufacturing sector transitioning from an increase to a decrease.

Infrastructure: The support from the fiscal end is starting to show a "bias". In September, the year-on-year growth rate of narrow infrastructure slightly rebounded from 1.2% in August to 2.2% in September, but this is not a complete signal of infrastructure repair.

Infrastructure performance has been "mediocre" so far this year. The year-on-year growth rate of narrow infrastructure has been continuously in a downward trend since the beginning of the year. The amount of fixed investment projects approved by the National Development and Reform Commission is significantly less than the same period last year, reflecting the core issue in infrastructure development is the current lack of large projects that meet the conditions for fund allocation. Although positive signals such as issuing ultra-long-term special national bonds and accelerating the progress of issuing new special bonds occasionally emerge, these factors are not entirely favorable for the infrastructure sector—ultra-long-term special national bonds are starting to tilt towards consumption (investing in "two news"), and new special bonds are beginning to intensify efforts to resolve risks in local small and medium-sized banks. At the same time, local governments are also working to resolve debt risks, which is not conducive to the development of infrastructure. Therefore, the timing of the turning point in the growth rate of infrastructure investment remains to be seen, and it will depend on the implementation of subsequent policies.

Consumption: Policy efforts have added a "boost" to consumption recovery. Despite the high base last year, the year-on-year growth rate of social retail sales rebounded higher than expected to 3.2% in September, with the year-on-year growth rate of retail sales above the quota also turning positive to 2.6% after three months of negative growth, driven by the rebound in retail sales of automobiles and furniture. The consumer sentiment index in the third quarter rose to 68.9%, higher than the same period in 2019.

Looking ahead, the leverage effect of 150 billion yuan in fiscal funds on consumption is expected to continue to be released during shopping festivals such as "Double Eleven" at the end of the year, and the "positive feedback" at the data level may also be a positive signal for future fiscal support for consumption.

Real Estate: "Volume and price" still need to stabilize. Real estate investment in September was down by -9.4% year-on-year, with a slight narrowing of the decline compared to the previous month. Prices are still adjusting, with new and second-hand residential prices in 70 cities down by 6.1% and 9.0% year-on-year in September, respectively, both narrower than in August.

Short-term policy impulses may find it difficult to change the current situation, and further policy efforts are needed to stabilize the market. The stabilizing policies for real estate increment announced during the press conference by the Ministry of Housing and Urban-Rural Development on October 17 are relatively mild: on one hand, the monetization of resettlement is positive, but at least the current increment of 1 million units for urban village renovations is limited compared to the annual average of 6 million units for shantytown renovations from 2015 to 2018; On the other hand, the press conference also emphasized "financial balance" and "avoiding the risk of new local government debt", which may reflect that ensuring project funding, completion, and risk prevention are still short-term policy priorities for the year.

Authors of this article: Tao Chuan S0600520050002, Shao Xiang, Li Xiaoyu, Zhong Yumei, Source: Chuan Yue Global Macro, Original Title: "4.6% Expectations and Reality"