Minsheng Taochuan: The Debate of 4.8% Between Old and New

The release of the third quarter GDP growth of 4.8% coincides with the convening of the Fourth Plenary Session. What signals does this send for the discussions on the economy and the "14th Five-Year Plan"? The economic slowdown in the first three quarters of this year is better than the same period last year, but the issue of structural differentiation, especially in the context of resilient exports, seems to have intensified. Therefore, the debate on the transformation of new and old driving forces in the Chinese economy will become an important clue for observing the communiqué of the plenary session and the draft recommendations for the "14th Five-Year Plan."

From the economic data of the third quarter, how does the ebb and flow of new and old driving forces affect policy assessment? Is it once again dominated by cyclical headwinds, or are structural challenges expected to be addressed? We believe there are several clues that need attention:

First, although the complete replacement of old driving forces by new ones will take time, it ensured that the economy did not stall in the third quarter. In the first three quarters, traditional growth engines such as real estate and infrastructure performed relatively weakly, while new driving forces represented by high-tech industries and manufacturing investment maintained leading growth rates. The accelerated reconstruction of the economy's endogenous driving forces lays the foundation for the plenary session to place future industrial development in a more prominent strategic position.

Second, the growth rate of residents' income has slowed to be on par with economic growth for the first time since the second quarter of 2023. This change indicates that the recovery of domestic demand and consumption is fraught with difficulties, requiring policies to hedge from short to long: in the short term, domestic demand should strengthen counter-cyclical adjustments to stabilize expectations, while in the medium to long term, the "14th Five-Year Plan" should systematically plan for income distribution reform and consumption incentives.

Third, under the current context where the marginal effects of "trade-in" and "anti-involution" policies are weakening, the stabilization of domestic demand and the rebound in prices still require continuous policy support as a guarantee. The previously outstanding growth rates of retail sales related to "trade-in" have shown a continuous slowdown, and some industries have also shown signs of "involution" again in September. The fourth quarter is a critical phase for testing the continuity of policies.

Fourth, cyclical challenges still need to be addressed, and the importance of "stabilizing expectations" remains unchanged. Recently, the central government allocated 500 billion yuan in surplus limits to local governments, aiming to supplement local financial resources and support project construction in major economic provinces, highlighting that the policy level is actively promoting the smooth transition between new and old driving forces. This move also suggests that the plenary session is likely to reassess the economic situation within the year, and signals of marginal policy easing are worth looking forward to.

Industry: The acceleration of production is not entirely due to seasonal factors; the phase-wise cooling of "anti-involution" is another reason. In September, the year-on-year growth rate of industrial added value rose to 6.5% (up from 5.2% in August), and the month-on-month growth rate increased to 0.64% (up from 0.37% in August), both showing an acceleration in industrial production in September Typically, industrial production in September accelerates seasonally due to the fading of extreme weather and the "catch-up production" effect before the holiday. However, this year, the month-on-month growth rate of industrial added value surpassed the historical average seasonal performance, indicating that the cooling of the "anti-involution" policy is another reason for the acceleration of industrial production.

From the performance of various industries in terms of volume and price, we can see traces of the cooling of "anti-involution." In the third quarter, the industrial capacity utilization rate rose from 74.0% to 74.6%, reaching the highest value this year, which is a result of the previous "anti-involution" efforts. However, according to our previous report "August Industrial Enterprises' Profits: Why the Strong Rebound?" and the dynamic four quadrants of "anti-involution," compared to last month, more industries returned to the second quadrant in September (representing a more severe state of "involution"), indicating that the consistency of "anti-involution" requires greater ideological cohesion, which may also be a major highlight of the plenary session.

Manufacturing: Corporate investment momentum remains weak. Since the U.S. imposed additional tariffs in April, the year-on-year growth rate of manufacturing investment has been in a downward channel, with the decline in September expanding from -1.3% in August to -1.9%. Currently, while the activity level of private investment in manufacturing has shown a slight marginal recovery, it remains overall weak, reflecting that the core factors affecting the growth rate of manufacturing investment are limited expectations and confidence recovery. Both insufficient effective domestic demand and external trade turmoil will suppress corporate investment momentum in the short term.

Focusing on different industries, compared to August, only a few industries in September have marginally increased their contribution to the growth rate of manufacturing investment. For example, upstream non-ferrous metallurgy and chemical products, midstream specialized equipment and electronic devices, and downstream pharmaceuticals and automobile manufacturing.

Infrastructure: A "warming" signal? The year-on-year growth rate of narrow infrastructure narrowed from -5.9% in August to -4.6% in September, showing a marginal warming signal, although the decline in broad infrastructure continues to expand. From the performance of detailed infrastructure data, the improvement in the transportation and storage sector in September was relatively significant, while the public utilities sector performed poorly, which also explains the divergence between narrow and broad infrastructure in September

Infrastructure will be the cornerstone of the economy in the fourth quarter, while also playing an important role in assisting the smooth transition between old and new driving forces. Looking at the entire investment side, due to the relatively lower closeness of infrastructure investment to private enterprises and the relatively larger room for recovery, its downward pressure is relatively controllable. Whether it is the support of policy financial tools or the recent allocation of part of the central government's fiscal surplus to local governments for supporting projects in major economic provinces, it all indicates that the logic of "stabilizing infrastructure" remains unchanged. From the recent high-frequency data performance, both the significantly rising asphalt operating rate since September and the asphalt inventory entering the replenishment cycle indicate that the commencement of infrastructure projects is showing marginal improvement.

Consumption: Subsidized categories such as home appliances combined with a decline in restaurant growth further drag down consumption growth. The retail sales growth rate in September fell to 3%, slowing for four consecutive months, mainly due to the overall decline in the intensity of "national subsidies" in the second half of the year and the front-loading of some durable goods consumption demand. Structurally, the growth rate of "increased support and expansion" products continues to decline, especially home appliances and audio-visual equipment, which have formed a significant drag, while communication equipment and automobiles show marginal recovery. In addition, the growth rate of restaurant income in September fell back to 0.9% after two months of rebound, possibly due to the partial overdraft effect of offline consumption during the summer.

The "trade-in" funds are nearing the end, and the necessity for incremental consumption policies is rising. With the last batch of "national subsidy" funds allocated in October, "trade-in" has entered the sprint stage, and local "trade-in" programs are expected to receive a new round of support, providing support for related durable goods consumption. However, given that the overall funding availability for "two new" has significantly decreased, the boost to domestic demand is limited. Therefore, subsequent incremental consumption policies may accelerate implementation, including reducing consumption restrictions and cultivating new growth points for service consumption, while also paying attention to reforms and deployments of income and consumption policies after the Fourth Plenary Session.

Real Estate: The real estate market continues to weaken, and pressure in the fourth quarter rises due to base effects. From January to September, the cumulative growth rate of real estate investment continued to decline to -13.9%, with demand still constituting a significant drag. Although real estate sales slightly improved in September, there was some overdraft in demand due to previous policy support. Since October last year, the large-scale introduction of policies has concentrated the release of home-buying demand, leading to a significant increase in the base, which has put considerable pressure on the real estate market for the remainder of the year. Therefore, the strength of policies to stabilize the real estate market in the fourth quarter needs to be further enhanced to consolidate the momentum for the real estate market to stop declining and stabilize

Author of this article: Tao Chuan, Zhong Yumei, Wu Shuo, Source: Chuan Yue Global Macro, Original title: "The Debate of 4.8% (Minsheng Macro Tao Chuan Team)"

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