Cycle of “illusion”: written in the first quarter before the data release

One of the illusions: the rise in prices brought about by the growth of illusions

The supply side reforms that began in 2016, driven by demand stimulus, brought about a sharp rebound in industrial raw material prices and industrial prices. Since September 2016, PPI from the negative after the sharp rebound sharply, 2017 PPI year on year growth rate of up to nearly 8% level, the price index rebound, at least brought two “illusion”, one is the improvement of business efficiency , The second is the rebound in fixed asset investment growth, if the price of the “flat”, you can find that growth may be just illusion.

(1) corporate income and profits mainly driven by price increases

After deducting price factors, corporate profits and income improvements are limited. From January to February, industrial revenues and profits rebounded sharply. In January-February, the main business income of industrial enterprises increased by 12.1% year-on-year and profits increased by 30.1% year-on-year. According to our estimates, after deducting price factors, January-February main business income growth rate of only 4.4% year on year, lower than last year’s 10-12 month-on-month growth rate, and did not exceed the beginning of 2014 year-on-year growth Of the fluctuation range.

Similarly, after deducting the price factor, the profits of industrial enterprises increased by only 0.6% year-on-year in January-February, compared with the actual year-on-year growth rate from September to November of 2016 (limited to -1.4 %, – 1.1% and -0.6% in December, 2016, the decline in profits, according to the Bureau of Statistics explained mainly because a small number of large enterprises due to product structure adjustment, asset restructuring impairment losses, investment income fluctuations, etc.).

In terms of industry, coal mining and washing industry, oil and gas extraction industry and ferrous metal smelting and rolling processing industry, the three most obvious price increase in the industry, revenue and profit improvement is also the most obvious, they are in January Of the main business income on the main business income growth rate of 17%, while the profit growth rate of contribution up to 47%. Obviously, if the removal of the most obvious price increases after the industry, on the whole, industrial enterprises revenue and profits of the actual growth rate did not appear obvious improvement.

Micro-point of view, if the profit and income is mainly contributed by the price, which means: micro-supply and demand situation is located in a balanced position, once the production of accelerated, is likely to lead to price decline, triggering profits and income decline. In turn, it does not take into account the mandatory constraints of supply-side reform, in such a high income and profit growth situation, the business needs of the future is not optimistic, so take the initiative to keep the production side of the low-speed operation.

(2) fixed asset investment and inventory investment “rebound” is also mostly driven by price increases

Similar to corporate income and profitability, fixed asset investment and inventory investment are similar. Investment in fixed assets grew 8.9% YoY in January-February, but according to our estimates, the actual investment in fixed assets increased by about 4-5% after deducting price factors. Obviously, despite the nominal growth rate rebounded, but the actual growth rate is still in the downstream channel.

The actual inventory did not pick up, and then the inventory cycle is mainly price-driven. Inventory investment Although the proportion of GDP is only 2-3%, but the stock investment is an important part of the output fluctuations. Since mid-2016, industrial products, finished product growth year-on-year growth began to bottom out, rebounded to 4.8% in February this year (Bureau of Statistics published comparable caliber of 6.1%). According to our estimates, after deducting the price factor, the actual finished product inventory growth in November 2016 only bottomed out, followed by a slight rebound, but the growth rate is still -2.5%. This may mean that the company is still cautious, take the initiative to make up for the lack of inventory, the past few months to make up the inventory is only the price increase brought “illusion.” This can also be confirmed in the manufacturing PMI data, since mid-2016, finished goods inventory index has been repeated between 44.4-47.6 fluctuations, never reached the expansion interval. Another noteworthy point is that manufacturing PMI’s finished goods inventory index is also bottomed out in December 2016, rather than mid-2016, compared with our estimated real-time finished product inventory growth rate of inflection point (2016 11 Month) is more consistent.

Illusion of the two: local overheating to bring the overall improvement illusion

Upstream raw material prices rose sharply, not to the middle and lower reaches, the improvement of supply and demand situation is only in the local. Performance in three areas:

First, the price is local. Supply side of the reform to reduce the supply of raw materials in the upper reaches, driven by the amount of upstream and downstream prices rise, the formation of local “inflation.” Upstream resources and midstream raw materials in February this year, followed by PPI 36.9% and 16.1%. However, the current price chain, the upstream downstream of the conduction is not smooth, the middle reaches of industrial products and downstream consumer goods rose very limited, PPI compared to only 1.2% and 0.8%.

Second, income improvement is partial. From the revenue point of view, the main improvement is driven by the price of upstream resources and the middle reaches of the raw materials industry, the two industries revenue growth from February 2016, respectively, from -18.1%, – 1.9% all the way up To February this year, 22.7% and 16.5%. Mid-range industrial products revenue growth in 2016 from February to October are between 2% and 5% fluctuations in December revenue growth rate reached 11.4% in February this year, down to 10.2%, did not form a clear trend. Downstream consumer goods revenue stable at 9% year on year, there is no significant growth. After deducting the price factor, the upper reaches of the raw material revenue growth are difficult to improve, the middle and lower reaches of the revenue growth is stable in the range fluctuations.

Third, the investment recovery is also partial. Only upstream resources related to the trend of improvement in investment, but year on year growth rate until the beginning of this year was negative to positive, 5.9%. However, the upstream resource industry’s fixed asset investment accounted for less than 2% of the total fixed asset investment, and therefore can not expect the upstream raw material industry to improve profitability to stimulate investment. While the middle reaches of raw materials such as steel and other industries are still facing the production capacity and environmental protection of the double restrictions, profitability can lead to investment recovery is still uncertain.

Obviously, can not expect local “inflation” to bring a lot of additional demand and then stimulate the investment of other industries, and profit improvement in the middle reaches of enterprises to invest in expansion of the initiative is not strong (on the middle of the capacity utilization has not yet played).

The illusion of the three: abnormal equipment investment growth led to Zhujiahui cycle illusion

The recent increase in the purchase of equipment and equipment does not verify a new round of Zagra cycle start. From the data point of view, the beginning of this year, equipment and equipment purchase year-on-year growth rate is still driven by real estate and infrastructure investment. From the production and sales of industrial products, the recent growth is the largest, excavators, heavy trucks, civilian ships and engines, these products and manufacturing investment is not, but to the real estate, infrastructure investment and transportation. More micro-evidence shows that the middle reaches of industrial products is mainly driven by two factors: first, infrastructure and real estate investment to bring the demand; second, since the third quarter of last year, the Ministry of Transportation new regulations strict ” Regulation “of heavy truck demand.

The improvement of private investment may be mainly related to the expansion of PPP project investment. January-February growth in private investment rose from 6.7% in December, respectively, to 4.1% in December (4.9.9% in November and 4.9% in November), while the contribution of infrastructure investment reached 25% (pulling 1.7 %), Far exceeding the level of the fourth quarter of 2016 (contributed by 1.4%, pulling only 0.07%).

We believe that this increase in investment in equipment is not driven by manufacturing investment (single-month growth rate of view, manufacturing investment in January-February growth rate of 4.3%, compared to November 2016, December 8.4 % And 9.6% instead of a decrease). The historical data, equipment investment in manufacturing investment accounted for about 2/3, the traditional sense of the Zhu Gela cycle is not fully launched.

Manufacturing investment failed to start the reason may be due to price increases brought about by the “excess profits” distribution problem, the current profitability is mainly to monopolize the supply of raw materials on the middle reaches of the state-owned enterprises, and downstream non-state enterprises in this round of price Profit is very limited, there is no incentive to increase investment in equipment. Another reason for the low willingness to invest in an enterprise is that the willingness to invest in finished goods inventory is weak. In the case of insufficient capacity utilization, it is clear that investment in fixed assets is also active in expanding investment.

Illusion of four: external demand is also an illusion

The total amount of the current round of global trade recovery is mainly due to the rise in commodity prices, after deducting price factors, the global real trade volume did not show significant growth. As of December 2016, the global trade growth rate is still running low, a single price-supported trade rebound rate is still uncertain. China’s exports as a manufacturing product in the short term will undoubtedly face the deterioration of the terms of trade: the price of imported raw materials, while the export price is subject to restrictions on competition is difficult to rise in place. On the whole, China may be difficult to rely on external growth momentum, which is determined by the following three factors: 1) China’s current GDP accounted for more than 15% of GDP, as economic and economic growth are located The world’s forefront of the country, it is difficult to rely on the past as to rely on the needs of other countries to stimulate the Chinese economy; 2) the weak recovery of the global economy in the United States on the Trump New Deal expectations and European and Japanese monetary easing, Unstable; 3) Trump government hostile attitude towards global trade, if the trade protection, China as the largest US trading partner is also likely to be the biggest damage.

External demand has not only improved, but also due to domestic demand spillovers lead to deterioration of domestic terms of trade to further bring the net loss of domestic welfare. The supply side reform has shrunk the supply of some industries in the middle and upper reaches, but the demand side has remained relatively stable. The supply shrinkage will lead to some of the demand in these industries to spill abroad. Since the third quarter of 2016, China’s total domestic demand growth year-on-year growth rate of GDP (domestic total demand for GDP minus net exports), the total demand in the fourth quarter of 2016 increased by the absolute amount of more than GDP increased by the absolute amount. The cost of such a demand spill is huge, on the one hand, China’s own demand is not strong, the digestion of domestic downstream products still rely on exports; on the other hand demand spill leading to upstream coal, iron ore prices, further leading to deterioration of China’s terms of trade.

Conclusion: Periodic illusion will eventually disillusionate

The increase in the price of local upstream raw materials caused by the reform of the excess liquidity supply, the rebound of the fixed assets investment, the improvement of the micro-enterprise performance, the recovery of the inventory cycle, the improvement of the economic growth ratio, the increase in the investment growth rate, “: With the second quarter demand margins weakened, high-profit enterprises in the upper reaches of the short-term increase in production power stronger, industrial prices (especially the upstream raw material side) down the risk of higher and higher: the recent data, raw material prices Growth has been a significant decline, and the base effect will also make PPI to the fourth quarter, a sharp decline in prices caused by the “illusion” is likely to quickly “disillusioned.” The first quarter of the economic growth data by the nominal price, low base and production accounting system may still appear to be “high”, but the “demand” level indicators have been signs of weakness, it is likely to further to the nominal price level Negative impact, thus piercing the “illusion of the cycle.”

Looking forward to see 1 to 2 quarters, leverage, demand, growth, profit and prices have reached the inflection point, the downward strength is getting stronger.