CICC: How to observe the overall economic situation from scattered high-frequency indicators?

According to the financial news app Zhitong Finance, CICC released a research report pointing out that the marginal improvement of domestic economic data this year. From January to February, the value added of industrial and service sectors on the production side, as well as the three drivers of demand side, all performed better than market expectations (including the contribution of leap year factors). The PMI in March was also higher than expected, and the income from Qingming Festival tourism in April was impressive, with per capita spending returning to pre-epidemic levels. However, prices remain weak, steel demand continues to decline, coal industry production restrictions by safety supervision have failed to stop the decline in coal prices, and infrastructure physical volume remains low. It is becoming increasingly important to observe the overall economic situation from various high-frequency indicators.

Key points from CICC:

Due to China being in a downward financial cycle and a period of transitioning growth momentum, CICC divides high-frequency indices into two major categories - real estate high-frequency indices and non-real estate high-frequency indices. The real estate high-frequency indices include sales (new and second-hand housing volume and prices), supply (land acquisition and new housing listings), financing (real estate enterprises and residential financing), upstream (steel, cement, glass), downstream (home appliances), totaling 20 indicators. The non-real estate high-frequency indices include mobility (human flow, logistics), consumption (automobiles, textiles, hotels, box office, etc.), exports (volume and price), production (electricity consumption, asphalt, automobiles, chemical industry operating rates), totaling 26 indicators.

CICC uses seasonal adjustment and moving averages to eliminate holidays, leap year factors, and outliers in high-frequency indicators, and reduces dimensionality to synthesize overall high-frequency indices, real estate high-frequency indices, non-real estate high-frequency indices, and various sub-indices through principal component analysis (85% variance contribution rate).

High-frequency indices show significant differentiation in post-epidemic real estate and non-real estate recovery

CICC points out that the overall economic high-frequency index experienced a pulse-like rebound in the first quarter of 2023; after the rapid release of demand in the second quarter due to scenario repair, it returned to endogenous momentum, with the overall and real estate high-frequency indices slowing down again, but the non-real estate high-frequency index continues to rise; in the third quarter, with the accelerated issuance of special bonds, stable real estate combination, comprehensive debt restructuring plan, and the addition of trillions of national debt, the real estate high-frequency index stabilized and rebounded, while the non-real estate high-frequency index continued to fluctuate at high levels; at the beginning of the fourth quarter, the real estate high-frequency index returned to a downward trend, and it slightly rebounded after a new round of relaxation in December, but the trend of the real estate high-frequency index has been downward since the beginning of this year, with increasing differentiation from the non-real estate high-frequency index. This is consistent with CICC's observation that the real estate and financial industries have made negative contributions to GDP since last year, while the non-financial real estate industry has made positive contributions to GDP growth, and the divergence between the price of rebar representing the old economy and the price of copper representing the new economy is also consistent.

In terms of real estate sub-items, supply and demand, financing, and upstream and downstream are all performing poorly

In terms of sales, new housing volume and prices are slowing down, with the sales area of 30 cities observed by CICC, as well as the sales area and amount of new housing by the top 100 real estate companies, showing a trend of slowing down. In March, the turnover period for new houses extended to 28 months. For second-hand houses, prices are falling in exchange for volume, with the average transaction price of homogeneous second-hand residential properties in 52 cities compiled by CICC falling by 1.2% month-on-month in March, with a year-on-year decline expanding to -15%. The transaction volume of second-hand residential properties in sample cities continued to rise, the number of second-hand houses listed for sale continued to increase, the extent of price adjustments continued to expand, and the average transaction period increased to 209 days From the perspective of supply, real estate developers are still cautious about land acquisition. The transaction volume and price of land in 300 cities are declining, with high rates of unsuccessful auctions and low premium rates. The number of newly launched housing projects remains at historically low levels, with a focus on rigid and improvement-oriented demand.

In terms of financing, although the first and second home mortgage rates in 100 cities in March have dropped to historical lows of 3.59% and 4.16%, respectively, and the average loan processing time at banks is around 22 days, the increase in new residential medium and long-term loans from January to March is only 30 billion yuan higher than the low level of last year. Real estate companies have only accumulated a net financing of 1.5 billion yuan through credit bonds this year.

Looking at the upstream and downstream sectors, this year, blast furnace and coking enterprises have seen a downward trend in capacity utilization rates, rebar production and apparent demand, as well as cement delivery rates. However, benefiting from policies such as appliance replacement, the compound growth rates of online and offline appliances have improved compared to December last year.

In terms of non-real estate sectors, liquidity indicators have performed well, with improvements in export trends and significant fluctuations in consumption recovery. Both consumption and export recoveries are quantity-driven before price-driven, either due to quantity over price or due to supply recovering faster than demand. The difference between supply (production and finished goods inventory sub-indices) and demand (new orders, new export orders, and backlog orders sub-indices) measured by PMI sub-indices is inversely related to the trend of PPI.

In terms of liquidity, human flow is better than logistics. Vehicle logistics have somewhat recovered since last year but are still below the levels of the same period in 2021. However, the national scale of migration, domestic flight numbers, congestion index, and subway passenger volume have all exceeded pre-pandemic levels, while the number of flights to Hong Kong, Macau, Taiwan, and internationally has reached a high point since March 2020.

In terms of consumption, quantity precedes price. Since the second quarter of last year, retail and wholesale sales of passenger vehicles have risen rapidly, but the year-on-year CPI for transportation prices has continued to decline from 1.1% in November 2021 to -4.6% in March 2024. Quantity-driven trends over price, quantity-driven trends in food, alcohol, tourism, communication equipment, clothing, etc., are present. Real social retail sales have been trending upwards year-on-year since last year, but the year-on-year trend of the social retail price index has slowed down. There are signs of price recovery, with the per capita spending on Qingming Festival travel exceeding pre-pandemic levels for the first time post-pandemic (100.5% of the pre-pandemic level, with travel volume exceeding pre-pandemic levels since last year's Labor Day). This year's consecutive holidays are the most in the past ten years, which helps release service consumption demand and restore service prices.

In terms of exports, quantity also precedes price. The deadweight tonnage of ships leaving the top 20 ports is near historical highs, while the export container freight index has slightly rebounded this year after continuous decline last year. This is consistent with the overall trend of year-on-year increase in export quantity and decrease in export prices since the pandemic was lifted last year.

In terms of production, since the beginning of this year, the coal consumption for electricity generation in 25 provinces has increased by 5.7% year-on-year, higher than the 3.7% in the fourth quarter of last year. Excluding seasonal factors, the trends of PX, polyvinyl chloride, polyester filament, and downstream weaving machine utilization rates are on the rise, indicating a relatively strong production of consumer goods. However, the asphalt utilization rate has declined slightly, indicating a slow recovery in physical infrastructure construction Comparing with the monthly indicators of the Statistics Bureau, there is a certain similarity between the non-real estate high-frequency index and the trends of manufacturing and service industry PMI, as well as the real estate high-frequency index and the trends of real estate investment and sales. In terms of asset implications, due to the use of the Principal Component Analysis (PCA) method, the overall high-frequency index is more influenced by the higher volatility of the real estate high-frequency index, showing a greater correlation with government bond yields. On the other hand, the overall high-frequency index calculated using the weighted average method is more correlated with the performance of the Wind Full A index over the past year, while the real estate and non-real estate high-frequency indices are more correlated with the performance of the real estate and non-real estate A-share sectors respectively