Calm Before The Storm: The Real Economy Is Building The Bottom.

In the long term, at present, we are in the second bottoming stage of the long term since the reform and opening up. The old and new cycles have decided that the economic fundamentals of the 2015 year will be stable and moderate.

Therefore, the stability of the currency and the adjustment of the economy have determined that China's capital market, including the stock and bond market, will remain in a long-term position.

During the short period, the macro-economy of China shows a very obvious quarterly fluctuation characteristics. Since 90s, the economic operation shows a "one up" feature between the quarters.

At present, the operation of the economy in a short period is in the balance between the downward pressure of the economy and the upward force of the policy. Therefore, the size of the growth is immediately reflected in the economic fluctuation.

It also shows that the key to understand the short period of China's economy is to understand the interaction between the government and the economic fundamentals.

Real estate investment dragged down economic growth.

China's real estate market has gone through the trend of demographic dividend turning point, long-term downward trend is difficult to reverse.

capital construction

Despite the decline in some of the hedging real estate investments, from the calculation results, no matter the industry's contribution to growth or the pulling of related industries, real estate is stronger than capital construction. Under the circumstances of financial constraints, it is difficult to completely hedge infrastructure investment.

At present, with the relaxation of policy and financial conditions, real estate sales have stabilised.

As real estate investment lags behind sales, real estate investment growth is expected to gradually bottom out from the end of the first quarter to the two quarter of next year, and the downward pressure on the economy will also be eliminated.

However, the overall downward and high inventory of the economy has restricted the upward space of the real estate industry. Therefore, even if the real estate industry stabilizes as scheduled in the two quarter of next year, the rate of recovery will be very limited in the second half of the year.

Economic growth slowed down employment.

When the real estate downturn continues to crush the economy, is it necessary to continue to adhere to the goal of "growth protection"? The data show that the employment data have a cyclical nature similar to the economic growth rate, which indicates that the logic of "ensuring growth will ensure employment" is still established.

However, we still need to guard against the fact that the low elasticity of employment and the risk of missing real unemployment data, so the bottom line of "growth guarantee" still exists.

Since the three quarter of this year, due to financial constraints, the way of growth is obviously shifted from fiscal stimulus to monetary stimulus. Some policies have double characteristics of ensuring growth and adjusting the structure.

As the growth target for next year is reduced from 7.5% to 7%, the pressure to maintain growth will be reduced, and the pace of structural adjustment will accelerate.

But when the economy still has downside risks, the policy will pay more attention to avoiding systemic risk.

A major concern for the government to implement a comprehensive loose monetary policy is that monetary pmission channels are not smooth enough to spawn asset bubbles.

At present, monetary policy is in the predicament of "barrier lake". On the one hand, banks are reluctant to lend money to obstruct the pmission channels of monetary policy to the real economy. On the other hand, the direct financing (the new issue of stock / debt market) is too costly, so that a large amount of money under the loose policy is deposited in the banking system, which makes the financial system passive and leverage.

Meanwhile, the opening up of capital account (Shanghai and Hong Kong), the reform of state-owned enterprises and the rapid development of margin trading have opened up the capital side of the capital market. Under the downward trend of the expected interest rate and the risk free interest rate created by the loose monetary environment, investors' enthusiasm has been raised, and incremental capital has continuously entered the stock debt market, pushing asset prices up rapidly.

Therefore, the market calls for a broad monetary and financial policy to complete "blocking" and "scattering" of the path of monetary pmission, so as to better introduce the "water" of the central bank into the ditches of the real economy.

Specifically, the CBRC and the SFC will "block" the flow of money in some "rigid payment" products, standardize the market of trust and financial products, liquidate local government debts, break the rigid payment and implicit guarantee, and promote the reform of risk-free interest rates; at the same time, "dredge" the financing channels of the direct financing market, and substantially reduce the financing cost of the real economy.

Comprehensive deleveraging will not start, but the "structural" deleveraging marked on the real estate industry chain will slowly start.

We are at the bottom of the cycle at the same time as 1999, but unlike the previous cycle, structural and gentle deleveraging will replace the drastic clean-up.

One of the important reasons is that the state-owned components of the economy at that time were too high and needed to be rectified. But the risk situation of the real estate industry chain and the local government debt that we face today is also very severe, but it has not developed into an overall systemic risk. Therefore, there will be a significant difference in the way of regulation and control.

In the current round of deleveraging, monetary policy will remain stable and loose, and will boost the long term slow down situation of various asset markets such as stocks and debt commodities.

The most ideal deleveraging path will follow the path of "blocking the loopholes by administrative intervention and guiding the flow of credit" and "promoting the development of multi-level direct financing market". The four paths parallel to the "one belt and one way to excess capacity" and the "pfer of leverage to the government during the crisis" will be promoted slowly.

In the longer term, from the 1978 reform and opening up to today's 36 years, we have undergone two whole long cycles of baptism. At present, we are at the point of alternation between the old and new cycles, and are at the bottom of the big cycle in 1999.

The macro-economy in 1999 and 2014 both experienced the impact of the international financial crisis in the early stage (the 97 Asian financial crisis and the 08 global financial crisis). The path of economic operation is similar. The two period's economic construction is mainly attributed to overcapacity and high leverage caused by over expansion, and bad debts have blocked the credit channels of banks.

Therefore, in these two periods, structural reform tends to start from the idea of "de productive capacity and deleveraging", aiming to solve the problem of medium and long term growth caused by oversupply of inefficient supply and insufficient effective supply.

In terms of policy, the government adopted positive fiscal policy and prudent monetary policy in 1999 and 2014.

In addition, there are many similarities between the two periods in the reform of state-owned enterprises, anti-corruption, the establishment of information management companies to clean up credit channels, and favorable policies in the capital market.

Whether it is objective economic operation or subjective policy, it is difficult to find two more similar periods in the long term perspective.

So many similar features seem to provide a basis for us to judge the current economic situation and policy trend.

The central economic work conference held in December 2014 is likely to have lowered the target of next year's economic growth from 7.5% this year to 7%, and we estimate that the potential growth rate of next year's economy will be around 7.2%. The last year's growth target for the next year will be down in 1998.

This means that the government's policy of ensuring growth will be significantly weakened. Small or directional stimulus policies will continue, and the economy will still show the characteristics of small fluctuations. The whole 2015 economy will be a smooth pition period of bottoming adjustment.

According to our calculations, the average annual growth rate will be between 7.1% and 7.2% in 2015.

With the stabilization of real estate investment, the lowest economic point will be stable at the beginning of the first two quarters of the first quarter, low in the first half of the year, and stable in the latter half year.

Looking at the whole world, China's structural reform is hopeful.

Since the 08~09 trough, the United States has successfully completed deleveraging, the fundamentals are recovering better, and China, Europe and Japan are in the process of structural reform.

The internal contradictions in the euro area and the inherent paradox in the financial and monetary framework of Japan make their reform process difficult.

China's structural reform is steadily advancing, and its root lies in the central government with strong executive power.

The intensity of economic recovery and recovery in the second half of 2015 depends on the intensity of structural reform.

China's structural pformation is top-down and initiative, and the executive power of the government is the key.

The main task of demand is to increase the income and consumption ability of residents, which requires a series of people's livelihood reform. The supply level will take finance, taxation, land, state-owned enterprises, finance and the legal system as the starting point.

In the darkness of the economic downturn, China's economy will usher in the next round of industrial upgrading and recovery.

This is because China's high-end labor costs have a huge competitive advantage compared with developed countries, that is, the engineer bonus.

It will drive the industry to upgrade in an all-round way, which is exactly the same as the logic of the 90s revival of the United States.

First of all, in the adjustment of the economic base, the differentiation of industries increased, the small and technological industries first went ahead, and then the pformation and upgrading of traditional industries were promoted, and the economy gradually picked up with the increase of productivity.

The process of destructive creation is accelerating, which marks the bottom of the great cycle.

Although there will be a pullback in the first half of 2015, we have caught the torch in the night to embrace the darkness before dawn and welcome the dawn ahead.