I. CHINA’S MACROECONOMIC PERFORMANCE
? China’s economy was contracting. December recorded a manufacturing PMI of 47, 1.0 percentage points lower than November. Large-sized manufacturers’ PMI was 48.3, 0.8 percentage points down from November; that of medium-sized manufacturers was 46.4, 1.7 percentage points down from November; and that of small ones, 44.7, 0.9 percentage points down from November.
? Industrial production dropped. In December, the value added of industries above the designated scale nationwide grew by 1.3% year on year, 0.9 percentage points lower than in November. Specifically, value added by manufacturing increased by 0.2% year on year; that of mining, by 4.9%; that of power, heat, gas, and water suppliers, by 7.0%; that of general equipment and special-purpose equipment manufacturing, by -3.4% and -0.5% respectively; and that of high-tech manufacturing, by 2.8%. From January to November, the total profit of industries above the designated scale decreased by 3.6% year on year.
? Import and export both kept slowing down. In December, USD-denominated export decreased year on year by 9.9%, 1.0 percentage points higher than the fall in November; import fell year on year by 7.5%, 3.1 percentage points down from the fall in November. In December, China recorded a trade surplus of 78.01 billion USD, 8.76 billion USD more than in November.
? Consumption remained sluggish. Total retail sales of consumer goods decreased year on year by 1.8% in December, 4.1 percentage points lower than the drop a month ago. Specifically, the y-o-y growth in retail sales of goods edged down by 0.1% year on year, 5.5 percentage points lower than the decline in November; catering revenue fell by 14.1% year on year, 5.7 percentage points higher than the fall in November. Automobile sales recorded a year-on-year growth of 4.6%, 8.8 percentage points higher than the monthly figure in November. For 2022, total online retail sales increased year on year by 4.0%; online retail sales of physical goods picked up by 6.2% year on year, accounting for 27.2% of total retail sales of consumer goods.
? Fixed asset investment slowed down, and real estate investment remained on a downward track. During January and December 2022, total fixed asset investment in China increased year on year by 5.1%, 0.2 percentage points down from the total increase in the first 11 months of the year; private fixed asset investment grew year on year by an accumulated 0.9%, 0.2 percentage points lower than the January-November figure. Specifically, manufacturing investment increased by an accumulated 9.1% year on year; infrastructure investment in the tertiary industry increased by an accumulated 9.4% year on year; real estate development investment reduced yearly by an accumulated 10.0%, 0.2 percentage points up from the January-November figure. Over the 12 months, the total floor space of commodity houses sold slid year on year by an accumulated 24.3%, 1.0 percentage point higher than the decline over the first 11 months of 2022; the total floor space of newly constructed homes reduced year on year by an accumulated 39.4%, 0.5 percentage points higher than the drop during January and November.
? CPI rose slightly, while PPI remained low. In December, CPI grew year on year by 1.8%, 0.2 percentage points higher than in November. Specifically, non-food prices increased year on year by 1.1%, the same as a month ago; food prices rose by 4.8% year on year, up by 1.1 percentage points from November. Core CPI excluding food and energy picked up by 0.7% year on year, 0.1 percentage point up from November. And PPI in December grew by -0.7% year on year, which was 0.6 percentage points narrower than the decrease in November.
II. MACROECONOMIC ENVIRONMENT
? The global economy continued to decline. The J.P. Morgan Global Composite PMI stood at 48.2 in December, 0.2 percentage points down from November; J.P. Morgan Global Manufacturing PMI came in at 48.6, 0.2 percentage points down from a month ago. Manufacturing PMI in the United States dropped from 49.0 in November to 48.4 this month, while that in the Eurozone rose to 47.8 from 47.1 in November, and that in Japan, from 49.0 in November to 48.9 in December. CRB commodity prices recorded zero growth month on month.
? The growth of social financing slowed down. The year-on-year growth rate of M1 in December was 3.7%, down 0.9 percentage points from November; that of M2 was 11.8%, down 0.6 percentage points from November. Social financing growth was 9.6% year on year, down 0.4 percentage points from November. December recorded newly formed social financing of 1.3 trillion yuan, a decrease of 0.7 trillion yuan from November. Among them, newly issued government bonds (government bonds + local government bonds + special bonds) were 0.3 trillion yuan, down 0.4 trillion yuan from November; newly issued corporate bonds stood at 0.9 trillion yuan (LGFVs included), down 0.2 trillion yuan from November; new debt of the household sector was 0.2 trillion yuan, down 0.1 trillion from November.
? The 7-day repo rate rebounded. The 7-day interbank pledged repo rate averaged 2.33% in December, up 40 basis points from November. The short-term liquidity spread represented by the difference between the 3-month SHIBOR and the 3-month government bond yield was 0.21%, up 12 basis points from November. The term spread, represented by the difference between the 10-year government bond yield and the one-year government bond yield dropped by 15 basis points from November to 0.63%; the credit spread, represented by the difference between the 10-year AAA-rated bond yield and the 10-year government bond yield rose by 16 basis point from November to 0.82%.
III. NEAR-TERM OUTLOOK AND RISK WARNING
1. China’s economy is in gradual recovery after the adjustment of the pandemic control policy.
2. The high-level real interest rate is a drag on the overall credit expansion, and endogenous demand remains weak.
3. The downturn in the external market puts pressure on China’s export.
IV. POLICY SUGGESTIONS
1. Lower interest rate by 25 bps each time until the employment and growth targets are hit.
2. Issue new types of fiscally subsidized bonds and policy loans to support investment in public goods and quasi-public goods infrastructure projects that feature limited returns.
3. Set up special funds to help market entities battered during the pandemic get back on their feet; increase the amount of living allowance for low-income groups.
4. Stabilize normal financing for real estate companies; introduce market-based competition on mortgage rates to reduce households’ debt burdens. To resolve the developers’ debt burdens, conduct pilot projects to convert some of the developers’ housing stock into government-subsidized housing.
