CICC: The necessity of strengthening policies is increasing

The base effect has increased, the end-of-quarter effect has faded, and demand remains weak, resulting in a decline in the growth rate of October data compared to September. The growth rate of consumption for trade-in has slowed down, while holiday consumption may have driven a recovery in catering revenue. Affected by weak demand and the pace of financial support, the decline in fixed asset investment has expanded. Real estate sales have shown a simultaneous drop in both volume and price. With demand falling in October and considering the high base in the next two months, the necessity for policy strengthening has increased.

The fading of the end-of-quarter effect combined with the decline in demand has led to a decrease in the year-on-year growth rate of industrial added value. In October, the year-on-year growth rates of industrial added value and service production index were 4.9% and 4.6%, respectively (compared to 6.5% and 5.6% in September). The month-on-month seasonally adjusted industrial added value in October was 0.17% (0.64% in September). We believe the decline in the growth rate of industrial added value is related to the fading of the end-of-quarter effect and also reflects the year-on-year decline in demand growth. In October, the year-on-year growth rate of export delivery value turned negative at -2.1% (3.8% in September), compounded by weak domestic demand and some industries experiencing reverse competition, which affected industrial added value. By industry, except for the public utilities sector which saw an increase in year-on-year growth, the mining and manufacturing sectors had year-on-year growth rates of 4.5% and 4.9%, respectively (6.4% and 7.3% in September), both declining compared to September. In specific sub-sectors, the year-on-year growth rates for automobiles and transportation equipment increased compared to September, while most other industries saw a decline in year-on-year growth.

The growth rate of trade-in consumption has slowed down, while holiday consumption may have driven a recovery in catering revenue. In October, the total retail sales of consumer goods grew by 2.9% year-on-year, a decline of 0.1 percentage points in growth rate. Among them, the growth rate of retail sales for trade-in items above the designated limit dropped to -2.2%, marking a return to negative growth after 12 months. The main contributors to this decline were home appliances (-14.6%), building decoration (-8.3%), and automobiles (-6.6%). Since the second half of the year, the trade-in policy has weakened, and the pull has diminished, compounded by the high base formed by policy stimulus in the same period last year, leading to a decline in the growth rate of related sub-items. Meanwhile, catering consumption, which had been weak in previous months due to related policies, rebounded from 0.9% to 3.8%, and the growth rates of retail sales for tobacco, alcohol, and beverages also rebounded, likely boosted by the Mid-Autumn Festival and National Day holidays. Additionally, the significant rise in gold prices has driven the growth rate of retail sales for gold, silver, and jewelry to 37.6%.

Affected by weak demand and the pace of financial support, the decline in fixed asset investment has expanded. From January to October, the cumulative year-on-year change was -1.7% (compared to -0.5% from January to September), with a month-on-month seasonally adjusted change of -1.6% (compared to -0.9% in September). By method, the negative pull from construction and installation projects and other expenses on overall fixed asset investment has increased, while the contribution of investment in equipment and tools has also slightly slowed down. We believe this reflects weak demand on one hand, and on the other hand, it may also be related to the pace at which new policy financial tools are being implemented into physical investments.

Real estate sales have shown a simultaneous drop in both volume and price, and the year-on-year decline in development investment has continued to widen. As the effects of previous real estate optimization policies in many regions quickly fade, combined with the impact of last year's high base, the year-on-year decline in the sales area and sales amount of newly built commercial housing in October widened, dropping from -10.5% and -11.8% in September to -18.8% and -24.3%, respectively In October, the CICC Homogeneous Second-Hand Residential Transaction Price Index fell by 1.5% month-on-month (with a quarterly average of -1.6%), continuing the previous downward trend. The transaction area of second-hand houses in 15 cities turned from positive to negative year-on-year, dropping to -16%. Partly affected by the high base of sales returns, the year-on-year decline in funds available to real estate companies widened to -21.9% (from -11.5% in September). Among these, the year-on-year decline in domestic loans narrowed to -6.7% (from -14.6% in September), while the year-on-year decline in self-raised funds expanded to -17.2% (from -12.1% in September). The year-on-year decline in deposits and advance payments and personal mortgage loans further widened (falling from -8.6% and -11.6% last month to -26.0% and -30.6%, respectively). In terms of land acquisition, under weak real estate sales and a slowdown in the supply of quality land, the year-on-year decline in land transaction volume in 300 cities widened to -27% in October (from 0% in September), and the average premium rate continued to decline. The year-on-year decline in new construction and completion areas significantly weakened (falling from -14.4% and 1.5% last month to -29.5% and -28.2%, respectively), while the year-on-year decline in construction area narrowed to -9.4% (from -19.8% in September). Real estate companies remain cautious in investment, with the year-on-year decline in development investment further widening in October (from -21.3% to -23.0%).

From January to October, infrastructure investment year-on-year fell to +1.5% (from +3.3% in January to September), with the year-on-year decline in October further expanding from 8.0% in September to 12.1%. In terms of sub-items, the year-on-year investment in public utilities, transportation, postal storage, water conservancy and environmental protection, and public facility management in October was -6.3%, -10.1%, and -19.0%, respectively, all widening compared to September. Recently, there have been marginally positive signals in the infrastructure sector, such as the new orders index of the civil engineering PMI rising from 47.7 in September to 49.6 in October, and new policy financial tools accelerating implementation, but this has not yet reflected in the October data. The policy effects may have a certain lag, and we expect that infrastructure investment may bottom out and rebound by the end of the year or early next year.

With demand falling, the connection of financial support is slow, coupled with some industries experiencing anti-involution, the growth rate of manufacturing investment is declining. From January to October, the cumulative year-on-year manufacturing investment was 2.7% (from +4.0% in January to September). Among the manufacturing industries that have released data, except for the electrical machinery and equipment manufacturing industry, which saw a slight marginal improvement from -9.5% in January to September to -9.4%, the year-on-year growth rates of other industries have all declined compared to September. We believe that the decline in demand, the slow transition of financial support from ultra-long-term special government bonds to new policy financial tools, and the anti-involution in some industries may jointly lead to the decline in the growth rate of manufacturing investment. We need to observe the progress of new policy financial tools and other financial support further landing in physical investment.

Authors of this article: Zhang Wenlang, Huang Wenjing, Zheng Yuchi, Deng Qiaofeng, Duan Yuzhu, Pan Zhidong, Source: CICC Macro, Original title: "CICC Macro | The Necessity of Strengthening Policies is Rising - October Economic Data Commentary" Risk Warning and Disclaimer

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