The findings of the Taihe Economic & Financial Outlook (August 2020) for the global financial and economic hotspots, global macroeconomic trends, and financial market trends in July 2020 are as follows:
1. Huge gaps remain in the economic and financial sectors. There is an obvious fault line between the supply side and the demand side both in the financial market and in the real economy. Capital supply fails to meet capital demand. The domestic downside demand is still in recovery with a temporarily irreversible trend of real economy deflation and financial market inflation. Chinese firms are taking the advantage of their relatively more complete supply chain, by shifting its economic focus from home to abroad or on the contrary, to alleviate the pressure of demand recession caused by the COVID-19 pandemic. Taking a long-term view, it is imperative to turn the virtual economy into substantial industries and develop the real economy in order to avoid the devastating impact of a bursting financial bubble.
2. Analysis of U.S. political and economic trends in terms of election and pandemic metrics. As the economic recession continues in the U.S., the Federal Reserve has printed more money and created more debt. The U.S. dollar has further weakened, and the price of relative physical commodities and financial derivatives will continue to rise. At the same time, President Trump has strengthened his hawkish foreign policies, leading to intensified global conflicts.
3. Unequal recovery is observed in the Chinese economy. Overall, the PMI of China’s manufacturing industry has been above 50% for five consecutive months. As the pandemic has been basically brought under control, the Chinese economy has generally maintained a moderate expansion. However, there are serious structural problems in the current economic recovery. The speeds of recovery differ sharply across firms, industries, and types of investment, showing no signs of convergence. This is also true between the production side and the demand side, which dampens the overall recovery of the aggregate economy. Although the Chinese economy continues to expand, it still needs further attention to the sustainability of the economic rebound.
4. Review of China’s price trend: the price trend meeting expectations, however, the structural data reflects that the long-term impact of the pandemic on the economy is far from over. The overall CPI inflation is moderate, but individual prices show some signs worth worrying about. It remains difficult for the recovery of the final demand. It is expected that within the next quarter, both CPI and PPI indexes will maintain a slight growth. The driving force of the CPI growth will come from the expansion of the supply gap and the rising price of live pigs. The narrowing of the PPI decline will be largely affected by the continued rebound in international commodity prices.
5. Review of the trends in China’s foreign trade: considering that the dividends of the pandemic “time gap” between China and the rest of the world still support exports, the export of anti-pandemic equipment cannot be ignored, and the export of China’s labor-intensive products are still very important in the international trade. In July 2020, the growth rate of exports considerably exceeded market expectations, hitting a new record high for the year, and continually showing a strong tenacity over the past six months. Following the sharp increase in the previous month of July 2020, imports witnessed a slight fall, which was slightly lower than market expectations, mainly due to the decline in commodity prices.
6. Review of China’s investment trends: overall, in 2020, the growth rate of fixed asset investment from January to July continues to rise, mainly due to the strong rebound in real estate investment. Despite the general policy of “house is for living not for speculation”, the current weak consumption and the increasing uncertainty in foreign trade have highlighted the role of fixed asset investment in promoting the economy. Although there are many problems in relying too much on real estate investment to stimulate the economy, the growth rate of investment in the third and fourth quarters is still expected to see a steady rebound or even exceed expectations in the current situation of a difficult recovery of the overall demand. China’s fixed asset investment structure continues to be heterogeneous. With the extremely limited investment room in infrastructure and manufacturing industries, the investment in real estate will continue its persistence beyond expectations.
7. Review of consumption trends: the continued narrowing of consumption data in July 2020 is in line with previous predictions, but the impact of the pandemic on consumption and income has not been alleviated, no matter judging from the single monthly data or the accumulated data. The main reason behind the increase in the absolute value of consumption is the continued high prices of necessities. The rebound of the consumption of necessary goods, represented by food, can only indicate that the impact of the pandemic is fading, but not enough to demonstrate the recovery of overall final goods consumption. “Retaliatory consumption” has been delayed, and demand recovery is still a long way off. In the long run, both the fundamentals supporting sustainable growth of consumption and the sustainability of consumption data growth are worth worrying about.
8. Review of the trend of industrial value added: the growth rate of China’s industrial value added has recovered to a certain extent. But from the perspective of the firm profits, China’s supply side has been affected by a profoundly serious fault line between supply side and demand side, and the mismatch between the products and their orders is the main reason for its weakening. Restored production capacity cannot be translated into effective orders in time, and industrial enterprises will lose the fundamentals of improving corporate efficiency. The recovery of upstream enterprises will be dragged down by downstream demand for some time. Therefore, the sustainability of the industrial rebound is in doubt.
9. Social financial data was slightly lower than market expectations. Since this year, the direct financing from government sector has accounted for a high proportion of social financing. This is certainly related to this year’s fiscal arrangements, but to a certain extent, it also reveals that the current recovery, based on the government’s leverage to create demand, which is not sustainable. The social financial data in the first half of this year is stunning, with 75% of the yearly target completed in seven months. Moreover, the capital market performed well supported by abundant liquidity. But this is a typical “inflation in the financial sector and deflation in the real economy” situation. To deal with it, the central bank has tightened monetary policy.
10. The stock market “has both a ceiling and a bottom”. From late July to mid-August of this year, the overall domestic stock market did not change much. The Shanghai Composite Index, Shenzhen Composite Index and the GEI all fluctuated within a certain range. With the stock market in its current state, both the upward and downward momentum of the market are obviously limited. The market is likely to maintain a status quo, waiting for the emergence of a new round of policies to be implemented before showing a clear trend. Currently, the situation remains unclear, and the possibility of obtaining speculative profits is small, so it is not recommended to invest too much in the stock market.
11. The interest rate in the bond market shows a “V” shape. Its trajectory in August is basically consistent with the predictions of the Taihe Economic & Financial Outlook (July 2020). The room for the rate to rise is still limited while existing certain investment opportunities. From the perspective of trading, large volumes of bond trading were based on the expectation of economic recovery and marginal tightening of monetary policy, and biding up the interest rate could be a profitable strategy. In general, the positions of bond investors are generally low, which adds flexibility.
12. The commodity market will improve in the medium term while fluctuating in the short term. Commodities first ushered in a wave of price increase in early August. On the one hand, this wave of such increase was affected by the PMI data in July, which shows improvement of demand and expansion of the economy. This has boosted the prices of commodities, especially those of raw materials. On the other hand, the prices were affected by the U.S. dollar index. In early August, the U.S. dollar index fell as the result of debt expansion and increased dollar supply. This factor also drove the increase in commodity prices. However, as the development of vaccine research around the world gradually enters a mature stage, the hedging needs of precious metals has slightly declined compared with the first half of the year. Coupled with the greater volatility of the U.S. dollar index, there is a high probability that the contract price of gold, silver, and other precious metals will be unstable. When investing in precious metals, one needs to be cautious about market quakes.
