Tianfeng: Long-term Economic Changes and Short-term Fluctuations

Tianfeng released a research report stating that the economy closed smoothly in the fourth quarter of 2024, driven by factors such as policies and export competition. It is worth noting that temporary factors such as the reduction in working days (2 days less) may lead to a certain decline in the growth rate of economic data such as employment in January and February. Looking at the medium term, the domestic economy is steadily de-propertying and undergoing economic transformation. Consumption and exports may become the biggest variables this year. The resilience of exports, the repair of consumption-driven economic growth, and the uncertainties surrounding policies and the economy this year are all things to watch for. Tianfeng's main points are as follows: The economy closed smoothly in 2024, with the GDP growing by 5.4% year-on-year in the fourth quarter, driven by policy initiatives, leading to a full-year GDP growth of 5%. Based on official data on industrial value-added and service production index estimates, the year-on-year GDP growth rates for October, November, and December were 5.2%, 5.2%, and 5.6% respectively, with the high growth in December being the main reason for the increase in the fourth quarter. The service production index in December increased slightly by 0.4 percentage points to 6.5%, while the industrial value-added growth rate increased by 0.8 percentage points to 6.2% year-on-year, driving the estimated year-on-year growth rate of the secondary industry up by 0.7 percentage points to around 5.8%, which is the main reason for the GDP rebound. After seasonal adjustment, employment in December increased by 0.6% month-on-month, higher than the five-year average of 0.2 percentage points. Factors such as the Spring Festival shift, export competition, and policy initiatives may have caused the industrial production in December to exceed seasonal trends. The short-term factor is the Spring Festival. In 2025, the Spring Festival is in January, and the rush for production before the Spring Festival provided some support to December's production. It is important to note that there were only 38 working days in January and February of 2025, 2 days less than in January and February of 2024. This may exert pressure on the year-on-year growth rate of employment in January and February. The medium-term factors are export competition and policy initiatives. The resilience of exports combined with the post-election "export competition" momentum led to a high growth in exports at the end of the year, with a 10.7% year-on-year increase in December and an 8.8% increase in export delivery value, significantly higher than the 6.2% year-on-year growth rate of industrial value-added. Before the tariff policy takes effect this year, exports are expected to continue to support production. With the "two new" policies at its core, policy initiatives mainly focus on industries such as equipment manufacturing and automobile manufacturing. In December, the general equipment manufacturing industry and the automobile manufacturing industry saw an increase of 3.3 and 5.7 percentage points to 7.7% and 17.7% respectively. Currently, with the continuation of the "two new" policies, production in related industries is expected to remain at high levels. Moreover, as production speeds up, the manufacturing capacity utilization rate in the fourth quarter rose slightly by 1.2 percentage points to 76.4%. The automobile manufacturing industry, benefiting from improved domestic and external demand as well as the faster clearance of inventories, saw a significant increase in capacity utilization, rising by 4 percentage points to 77.2% in the fourth quarter, significantly higher than other industries. Looking at the year as a whole, the characteristics of the rise in service consumption, the sustained high level of exports, the gradual de-propertying of the economy, and the further optimization of the manufacturing industry structure are more evident. Consumption remains a key support for GDP, and it is estimated that the proportion of final consumption in GDP in 2024 is around 55.2%, slightly lower than in 2023, and close to pre-epidemic levels. Due to the decline in real estate investment, the proportion of final capital formation in GDP has decreased from 43.3% in 2021 to around 41.4% in 2024. The buoyancy of exports has led to an increase in net exports to 3.5%, a new high in recent years. According to approximate estimates by HS, the proportions of capital goods, intermediate goods, and consumer goods in China's exports from January to November 2024 were 46.1%, 25.3%, and 28.6% respectively, with changes of 1.0, -0.2, and -0.8 percentage points compared to 2023. The proportion of capital goods continues to increase, while the proportion of consumer goods continues to decrease. Specifically, exports remain the main support for the economy in recent years, benefiting from domestic industrial upgrading and global industrial chain restructuring. In 2024, exports (in RMB terms) increased by 7.1% year-on-year, significantly higher than the GDP growth rate. Within the export structure, the proportion of capital goods and technology-intensive goods steadily increased, while the proportion of consumer goods and labor-intensive goods slightly decreased. In terms of consumption, the pattern of strong service consumption and weak goods consumption continues. In 2024, per capita income, consumption expenditure, and retail sales of consumer goods in total social retail sales grew by 5.3%, 5.3%, and 3.5%, respectively. The growth rate of residents' service consumption expenditure reached 7.4%, significantly higher than the 3.6% growth rate of goods consumption expenditure. As the impact of the epidemic diminishes, service consumption may continue to grow faster than goods consumption, indicating that although the growth rate of total social retail sales is low, the final consumption expenditure, including service consumption, remains the main support for economic growth. It is important to note that the growth in goods consumption in the second half of 2024 to some extent relied on the support of the policy of replacing old with new. The internal growth momentum of consumption is relatively weak. With the high growth rates of some goods consumption in 2024 (such as the retail sales of household appliances and audio-visual equipment of units above the designated limit increased by 12.3% year-on-year, 11.8 percentage points faster than the previous year), policies need to consider how to better stimulate residents' willingness to consume goods to cope with the pressure on growth rates brought about by the high base period. Regarding fixed asset investment, investment is gradually de-propertying, with the proportion of manufacturing investment continuing to rise and the internal structure gradually improving. In 2024, real estate investment declined by 10.6% year-on-year, marking the third consecutive year of significant negative growth in real estate investment. As a result, the proportion of real estate investment in fixed asset investment decreased from 27.1% in 2021 to 19.5% in 2024, significantly lower than the proportions of manufacturing industry and infrastructure. With the decline in the proportion, the drag of real estate investment on fixed asset investment and on the economy is gradually slowing. Driven by policies such as equipment renewal, manufacturing investment has remained at a high level in recent years, with a 9.2% year-on-year increase in manufacturing investment in 2024, continuing to increase its share of total investment.Investment in technological innovation increased by 8% compared to the previous year. The sustained high growth in manufacturing investment has also led to its proportion increasing from 32.9% in 2021 to 36.4% in 2024, significantly exceeding infrastructure and real estate.In the sub-item structure of manufacturing industry investment, the proportion of high-tech manufacturing steadily increases, and the structure gradually optimizes. From January to November 2024, the proportion of computer, communication and other electronic equipment manufacturing, electrical machinery and equipment manufacturing, and special equipment manufacturing increased by 5.9%, 2.8%, and 1.2% respectively compared to 2015, with a cumulative share of 28% of manufacturing investment, making it the most important component of manufacturing investment. Overall, the fourth quarter of 2024 ended smoothly under the promotion of policies, export expansion, and other factors. It is worth noting that temporary factors such as having two fewer working days may put pressure on the growth of economic data such as employment in January and February. Looking at the medium term, the domestic economy is steadily advancing in deindustrialization and economic transformation. Consumption and exports may become the most volatile factors this year. Whether exports can maintain resilience and how to repair the internal driving force of consumption are the biggest uncertainties in policy and economy this year. Risk warning: Pay attention to geopolitical changes, domestic economic changes, and subsequent policy interpretation.