In-depth analysis! How is China's economy really doing?

Let me first educate the brothers: how money is generated, as mentioned before, it mainly comes from three sources:
The first is "printing" money, which refers to the physical act of "printing" currency by the central banks of various countries.
Second is borrowing money, the "derivative currency" created by banks through leveraged lending.
The third is "making" money, which is the currency generated through the quantitative easing policy of "flooding the market".

The currency issuance by the central bank is achieved by rediscounting, loans, purchasing securities, acquiring gold, foreign exchange, and other means to inject into the market, thus forming the base currency in circulation.

The statistics bureau may have been the hardest-working department in the past six months. With the release of the half-year data, it looks like the macroeconomic and social financing data are quite good, and the market has basically formed a consensus that there will be no stimulus policies in the third quarter.

Is it really that good?

Now let's take a look at the current overall economic situation:

01. First, look at the macroeconomic data:

GDP: The domestic gross domestic product grew by 5.3% year-on-year in the first half of the year. Among them, it grew by 5.4% year-on-year in the first quarter and 5.2% year-on-year in the second quarter, a decline.

Value Added of Above-Scale Industries: In the first half of the year, the nationwide value added of above-scale industries increased by 6.4% year-on-year. Among them, in June, it increased by 6.8% year-on-year, and in May, it increased by 5.8%, showing growth.

Fixed asset investment: In the first half of the year, national fixed asset investment (excluding rural households) increased by 2.8% year-on-year. Among them, June's year-on-year change was -0.1%, while May's year-on-year change was 2.7%, showing a decline.

Total retail sales of consumer goods: In the first half of the year, total retail sales of consumer goods increased by 5% year-on-year. Among them, June saw a year-on-year increase of 4.8%, while May recorded a year-on-year increase of 6.4%, showing a decline.

Infrastructure Investment (Excluding Electricity): In the first half of the year, infrastructure investment (excluding electricity, heating, gas, and water production and supply) increased by 4.6% year-on-year. Among them, the year-on-year growth in June was 2.0%, and in May it was 5.1%, showing a decline.

Real estate development investment: There is currently no publicly available year-on-year data for the first half of the year, but from the monthly data from January to June, real estate development investment has continued to decline year-on-year, with June down by 12.9% year-on-year and May down by 12.0%, a decrease.

Real estate sales area: No public data on the year-on-year data for the first half of the year, June year-on-year -5.5%, May year-on-year -3.3%, decreasing.

Real estate sales amount: There is no publicly available year-on-year data for the first half of the year, June year-on-year -10.8%, May year-on-year -6.0%, a decline.

Manufacturing Investment: In the first half of the year, manufacturing investment increased by 7.5% year-on-year. In June, the year-on-year growth was 5.1%, down from 7.8% in May.

Imports and exports (in USD): In the first half of the year, the year-on-year growth of goods trade imports and exports increased by 2.9%. Among them, exports grew by 7.2%, and imports decreased by 2.7%. In June, exports increased by 5.8% year-on-year, and in May, the year-on-year increase was 4.8%; in June, imports increased by 1.1% year-on-year, while in May, there was a year-on-year decrease of 3.4%, showing growth.

The three drivers of GDP still rely on investment, which is supported by the supply side, with funding sources entirely dependent on government debt; exports are temporarily stable, mainly due to the delay in tariffs, filling the gap with the export rush effect; domestic demand is insufficient, and consumer spending plummets sharply as soon as the trade-in program is slightly halted.

Let's first talk about the supply-side issues:

After the pandemic, the value added of industrial enterprises above designated size has maintained a relatively high growth, but the PPI has continued to decline. In fact, the PPI has been falling for 33 consecutive months.

In June, the value-added of large-scale industrial enterprises increased by 6.8% year-on-year, an increase of 1 percentage point; the PPI decreased by 3.6% year-on-year, a decline of 0.3 percentage points; the deviation between the two further expanded to over 10 percentage points.

The continuous decline in PPI indicates overcapacity in the midstream and upstream sectors.

Secondly, there is the issue on the demand side:

It is necessary to specifically mention the detailed data of social consumption, which is very contrary to common sense. In June, the year-on-year growth rates for retail sales of consumer goods and catering revenue were 5.3% and 0.9%, respectively, down 1.2 and 5.0 percentage points from the previous month.

In retail above the limit, the year-on-year growth rates for communication equipment, home appliances, audio-visual equipment, furniture, and cultural office supplies are 13.9%, 32.4%, 28.7%, and 24.4%, respectively, with changes from the previous month of -19.1, -20.6, 3.1, and -6.1 percentage points.

In the retail above the quota, the retail sales of tobacco, alcohol, and beverages fell by 0.7% and 4.4% year-on-year, a decrease of 11.9 and 4.5 percentage points compared to last month.

Interestingly, in June, social retail sales increased by 4.8% year-on-year, but the CPI year-on-year growth rate was only 0.1%. Generally speaking, strong consumption indicates strong demand, which would lead to rising inflation.

However, from the performance of the divergence between volume and price in the first half of the year, it can be seen that current market demand remains sluggish, production capacity is still excessive, and it is still in a difficult clearing cycle of exchanging price for volume.

I can't understand it, let alone comprehend it.

In summary: the growth of the economy is slowing, there is excess capacity on the supply side, insufficient domestic demand, money hasn't been less printed, yet prices are sluggish, indicating that money has not entered the real economy.

02. Let's take a look at the financial data:

M2: There is no publicly available overall year-on-year data for the first half of the year. The year-on-year growth in June is 8.3%, and in May it is 7.9%, showing an increase.

Social financing: There is no publicly available year-on-year data for the first half of the year; June year-on-year is 8.9%, May year-on-year is 8.7%, showing growth.

CPI: In the first half of the year, the national consumer price index (CPI) for residents decreased by 0.1% year-on-year. Among them, June saw a year-on-year increase of 0.1%, while May recorded a year-on-year decrease of -0.1%.

PPI: In June, the national PPI decreased by 3.6% year-on-year, compared to a decrease of 3.3% in May.

This year's entire half, the social financing has been supported entirely by government debt.

There has been no improvement in loans to enterprises and residents as market entities; from January to June, new loans to residents have shown a declining trend year by year, indicating a lack of confidence in the household sector.

The only highlight is short-term loans for enterprises, the reason is unknown.

The most important thing is that the released funds have not reached the residents. The loan balance of residents accounts for an increasingly smaller proportion of social financing, which has fallen to 19.52%, declining for 21 consecutive months, and has been below 20% for 5 consecutive months.

Where has the money gone? In fact, over 60% of social financing comes from government and state-owned enterprises, followed by loans to large manufacturing companies. In other words, each year, the rapidly growing money flows more into the government sector and investment areas, and less into the residential sector and consumption areas.

Less capital flowing into the residential sector cannot stimulate consumption, while more capital flows into the government sector and state-owned enterprises. Government departments, lacking the regulatory role of market mechanisms, concentrate investments. The upstream production capacities of coal, steel, cement, and other industries controlled by central state-owned enterprises are generally in excess, leading to a continuous decline in prices and prolonged deflation.

In terms of deposits, in June of this year, household deposits and corporate deposits increased by 2.47 trillion and 1.78 trillion respectively, which is an increase of 0.33 trillion and 0.78 trillion year-on-year.

The new deposits of 2.47 billion yuan from residents are quite exaggerated, with cumulative new deposits reaching 10.77 trillion yuan in the first six months; meanwhile, new loans amounted to only 597.6 billion yuan. Based on historical data calculations, the resident deposit-loan ratio for the first six months is 9.21.

This represents that residents are unable to obtain loans on one hand, while desperately saving on the other hand. This is a typical contraction manifestation. Of course, it is more likely a problem of capital allocation, which is not convenient to elaborate on here.

Overall, the structure of social financing exhibits the structural characteristics of "strong government, weak residents", "strong deposits, weak credit", and "strong short-term loans, weak long-term loans."

03. Finally, look at the financial data:

Unlike economic and financial data, fiscal revenue has been in negative growth since last year. Generally, GDP and revenue tend to move in the same direction, and for a long time, the growth rate of China's GDP has been consistent with the growth rate of tax revenue. From 2010 to the third quarter of 2018, the average deviation between the two was only about 2 percentage points.

However, starting from the fourth quarter of 2018, the average deviation between the two began to expand to about 9 percentage points.

In the first half of this year, the actual GDP growth rate was 5.3% year-on-year, while tax revenue from January to May decreased by 1.6% year-on-year, resulting in an exaggerated deviation of 6.9 percentage points between the two.

A decrease in fiscal revenue indicates a problem: that is, under the condition of a constant total economic volume, the profits generated by economic activities have decreased, meaning that the efficiency of the economy has worsened.

We analyzed the economic situation from three aspects: macroeconomics, financial data, and fiscal policy. The conclusion is that the overall economy is acceptable, but there are significant structural issues. There is too much money on the supply side, leading to overcapacity, while on the demand side, there is insufficient domestic demand from residents. The consequence of this is a decrease in economic efficiency.