Event

China's August CPI is 2.8% year-on-year and is expected to be 2.6%, with a previous value of 2.8%. China's August PPI is-0.8% year-on-year, expected to be-0.9%, and the previous value is-0.3%.

Unscramble

1 after taking off the pig, there will be deflation. The main characteristics of the August inflation data are as follows:

1) after removing the pig, there will be deflation: the downward pressure on the economy will increase, the core CPI and PPI will be negative for two consecutive months, and the real interest rate will rise.

When the market was pessimistic at the end of 2018, we proposed that "the economy will be stable in 2019, but the market will not be extremely prosperous". Then the economy temporarily stabilized in the first quarter, and the Shanghai Composite Index rose 25.37% in the first quarter.

After the release of the June data, the market was full of voices of "economic stabilization", "stabilizing and rebounding" and "exceeding expectations". As a researcher who has been engaged in the analysis of the macroeconomic situation for 20 years, I feel deeply worried. In particular, a series of financial tightening policies from May to June are entirely based on the "Xiao Yangchun" data at the beginning of the year, and lack of forward-looking estimation or even miscalculation of the severity of the future situation.

Most statistics reflect the past, not the future. To analyze the situation, we should not be hindsight, but should be forward-looking and have a framework and logic. Therefore, we clearly put forward the view of shaking the market that "we should fully estimate the seriousness of the current economic and financial situation."

As the economic and financial data fell across the board in July, we prospectively judged the direction of monetary policy and cut interest rates on time. The data of social finance, credit and M2 fell in an all-round way in July, and the effect of the policy from wide money to wide credit was poor, simply because the real interest rate of enterprises did not decline, the liquidity delivery channel narrowed, and the depressed asset prices could not play a mortgage amplifier effect. Social integration leads the real economy and investment, which means that there is greater downward pressure on the economy from the second half of the year to the first half of next year.

At present, the downward pressure on the economy has increased, the global interest rate cut, the exchange rate has broken through "7", the core CPI has continued to fall, and PPI has been growing negatively for two consecutive months, stepping into deflation, indicating that the space for monetary easing has been opened. The time has come for the 730 Politburo meeting to announce a return to monetary easing.

2) Why can't we control a pigThe super pig cycle keeps CPI high and drives up the prices of other meat and eggs. Pork rose 23.1% in August from the previous month, driving up the prices of beef, mutton and eggs by 4.4%, 2.0% and 5.9%, respectively.

The rise in pig prices is mainly due to the continuous deterioration of pork supply and demand, and the price increase in this pig cycle is large and fast, which can be called the super pig cycle. The main reasons: first, the expansion of the environmental protection policy has a significant impact on the supply of pork.

Pig farming in China is mainly small-scale scattered breeding, and the number of farmers with less than 50 heads accounts for 94%. Second, African classical swine fever has been rampant in China since last year, and the technical and medical level of some medium-sized farms can not reach the level of large-scale farms, which leads to more serious losses. Third, at present, it is in the rising stage of a new pig cycle, and there is an endogenous upward driving force in pork prices.

Non-food CPI growth slowed for five months in a row, and core CPI rose 1.5% year-on-year, down 0.1% from the previous month.

PPI has been negative for two consecutive months, the decline has widened, deflation has intensified, and real interest rates have risen. Mainly due to the lack of internal and external demand, the tightening of real estate financing led to the decline of real estate investment, infrastructure was depressed by hidden debt control and land finance decline, black, non-ferrous and other prices fell. In addition, the decline in international oil prices has led to a significant decline in domestic crude oil exploitation, downstream chemical fiber manufacturing and other industries.

3) the current pig cycle is expected to last until the second half of 2020:CPI will fluctuate around 3 per cent in the fourth quarter and may exceed 3 per cent in individual months at the end of the year.The main reason is that the current pork shortfall is as high as 10 million tons, with pork imports totaling only 1 million tons from January to July, and pork imports account for only 3% of China's pork consumption, so it is difficult to make up for the gap.

Although various departments have taken many measures to ensure the supply of live pigs, it takes time for the implementation of the policy, the construction of pig farms and the growth of pigs.

Pork prices will continue to rise this year, driving CPI to break through 3 per cent by the end of the year. Pork supply is expected to reach an inflection point in the second half of 2020 and prices will fall.

PPI will continue to decline due to weak internal and external demand, suppressing corporate profits and manufacturing investment.In terms of external demand, the global economic downturn and the escalation of Sino-US trade frictions drag down exports, which in turn affects PPI along the industrial chain. In terms of domestic demand, leading indicators such as financing, sales, land purchase and new construction have declined, and real estate investment has declined; although some new special debt quotas have been issued in advance, the new amount is limited, and the extent of infrastructure promotion is expected to be limited.

4) it's time to cut interest rates.It is suggested that we should strengthen the counter-cyclical adjustment, lower the MLF interest rate and guide the real interest rate downward, attach great importance to the dredging of monetary policy transmission channels, and issue part of the new quota of special debt next year as soon as possible. At present, on the one hand, we should prevent the release of money from causing asset bubbles, on the other hand, we should also prevent taking the initiative to pierce and cause major financial risks, trade time for space, find new economic growth points, expand reform and opening up, and mobilize the enthusiasm of local governments and entrepreneurs.

2 Super pig cycle drives CPI to keep high, core CPI and non-food CPI down.

CPI rose 2.8% in August from a year earlier, unchanged from the previous month, but 0.2 percentage points higher than expected. It rose 0.7% month-on-month, stronger than seasonal for two months in a row. The sharp rise in pork prices is the core driving force behind CPI. Pork prices surged 23.1% month-on-month in August, expanding to 46.7% from a year earlier. The year-on-year increase has exceeded the peak of the previous pig cycle and reached a nearly eight-year high; the pig-to-feed ratio has reached 13.1, surpassing the previous high of 10.9 and well above the break-even point.

The current pig cycle began in mid-2018, showing a large increase, fast speed and other characteristics, the price increase is the largest in any previous pig cycle, which can be called the "super pig cycle". There are three main reasons:

1. It is the expansion of the environmental ban policy that has a significant impact on the supply of pork. In recent years, China has issued a large number of environmental protection policies for the pig breeding industry, and designated pig breeding prohibited areas. However, in the process of implementation, problems such as increasing the implementation of policies and expanding the scope of no-raising areas have occurred in some places, resulting in a large number of farmers withdrawing from the market, and the number of small-scale farmers with a scale of less than 50 accounts for 94% of China's pig farmers.

2. African classical swine fever has raged in China since last year, affecting all provinces, cities and regions in the country. At present, there have been 143 cases of African classical swine fever, culling more than 1.16 million pigs. Due to the lack of effective vaccines and the imperfect network of grass-roots disease prevention and control, it is still difficult to control the spread of classical swine fever in Africa.

3. In addition to classical swine fever and environmental protection, the endogenous pig cycle is currently on the rise.

The rise in pork prices has driven up the prices of other meat and eggs, with beef, mutton and eggs rising 4.4%, 2.0% and 5.9%, respectively, month-on-month. In the later stage, we need to pay close attention to the changes in meat prices to prevent pork prices from rising too fast to lead to the self-realization of other meat prices, and further push up inflation and the cost of living of residents.

In addition, a large number of fresh fruits are on the market, and the price of fresh fruit has dropped sharply by 10.1% compared with the previous month. The year-on-year increase in vegetable prices also dropped significantly this month.

Insufficient aggregate demand dragged down non-food CPI growth for the fifth month in a row, with core CPI rising 1.5 per cent year-on-year, down 0.1 percentage points from last month. Non-food prices rose 1.1% from a year earlier, down 0.2 percentage points from the previous month and falling for the fifth month in a row. As a lagging indicator, the continued decline in non-food prices confirms the increasing downward pressure on the current economy and once again confirms our judgment on the current economic and financial situation.

Among them, the escalation of trade friction between China and the United States will be a drag on global economic growth. International crude oil prices fluctuated at a low level in August, which was significantly lower than that in July. Brent crude oil prices fell nearly 7 per cent from the July average, driving domestic gasoline and diesel prices down 1.1 per cent and 1.2 per cent respectively.

In other respects, the prices of hotel accommodation, air tickets and travel agencies rose 1.6%, 0.8% and 0.3% respectively in August, but the increase was 0.6%, 18.5% and 8.3% lower than that in July, which was lower than that in August last year as a whole. The sluggish season shows that household consumption is still under pressure. In addition, year-on-year increases in clothing, health care and housing also fell 0.2, 0.3 and 0.5 percentage points to 1.6%, 2.3% and 1.0%, respectively, indicating that current aggregate demand is still low.

3 PPI has been negative for two consecutive months, deflation has intensified, real interest rates have risen and profits are under pressure, and interest rates need to be cut to hedge.

In August, PPI fell 0.8% from a year earlier, an increase of 0.3% over the previous month, and deflationary pressure further intensified. It fell 0.1% month-on-month, weaker than seasonal for three months in a row. From a sub-industry point of view, prices in major industrial sectors have declined to varying degrees. Among them, the tightening of real estate financing has dragged down demand from sectors such as black and cement, driving prices down 0.7% and 0.4% respectively from the previous month.

In addition, affected by the fall in international crude oil prices, the entire oil industry chain has fallen to varying degrees. Oil exploitation is 0% month-on-month this month, but the year-on-year decline widened by 0.8 percentage points to 9.1%. Among the downstream industries, the chemical fiber manufacturing industry was more significantly affected, with prices falling 2.3 per cent in August from a month earlier, the largest decline in all industries, with a year-on-year decline of 4.1 percentage points to-8.9 per cent.

PPI persistent deflation will be a drag on corporate profits, real interest rates rise, we must cut interest rates as soon as possible to hedge. On the one hand, the decline in corporate profits will increase the probability of layoffs and increase the risk of employment, on the other hand, it will lead to pessimism about the future, reduce investment and drag down macroeconomic growth.

The year-on-year growth rate of profits of industrial enterprises has declined rapidly since the formation of deflationary expectations at the end of last year, and this year's profit growth continues to be negative, with a growth rate of-1.7% from January to July, which is a significant drag on manufacturing investment. At the same time, due to the limited decline in nominal interest rates, the sharp decline in PPI will significantly push up the level of real interest rates and increase the financing costs and debt risks of real enterprises, so it is necessary to accelerate interest rate cuts to hedge.

4 Future outlook: CPI will still fluctuate at around 3%, and may break through 3% by the end of the year.

For CPI, although the tail warping factor narrowed after September, pork prices will rise further during the year as the current pork supply gap is still large, so CPI is still expected to fluctuate around 3 per cent during the year and may exceed 3 per cent by the end of the year.

At present, the shortage of pork supply is still large, and pork prices will continue to rise in the short term. Pork supply is expected to reach an inflection point in the second half of 2020, and pork prices are expected to fall in the second half of 2020.

Since the beginning of this year, due to a growing pork supply gap, China has stepped up its efforts to import pork from South America and other places. From January to July, China imported a total of 100.09 tons of pork, an increase of 36% over the same period last year. However, compared with the supply gap of about 10 million tons, the import quantity of pork is still low, so it is difficult to stabilize the market supply. At present, in order to alleviate the tight supply of live pigs, many ministries have introduced relevant measures to ensure the supply of live pig products. Unripe

The Ministry of Environment and the Ministry of Rural Agriculture jointly issued a circular requiring all localities not to designate no-maintenance areas except for core areas such as drinking water source protection areas and scenic spots. Cancel the prohibited areas found in the investigation that exceed the provisions of laws and regulations and overzoned.

The Ministry of Agriculture and Village and the Ministry of Finance have also issued a document to provide liquidity support for pig farming enterprises to stabilize the willingness of pig production. However, because the implementation of the policy takes time, and it usually takes about 6 months for piglets to be fattened and 12-13 months for sows to mature, and the current African classical swine fever vaccine has not been successfully developed, the pressure of epidemic prevention is still high.

Therefore, pork supply will not reach an inflection point until mid-2020 at the earliest, and pork prices are expected to fall in the second half of 2020.

In terms of PPI, the PPI downturn may continue in the second half of the year, increasing deflationary pressure.Global commodity prices continue to face downward risks in the second half of the year. From the perspective of external demand, China and the United States are about to launch a new round of negotiations in early October, but the prospects for the negotiations are still highly uncertain. At present, some of the new tariffs imposed by the two sides have been landed on September 1 and some will be on the ground in December. The negative effect of imposing tariffs on exports will gradually appear in the second half of the year, resulting in a further blow to exports, and then transmit the impact on PPI upward along the industrial chain.

From a domestic point of view, the recent executive meeting of the State Council decided to issue ahead of schedule some of the new special debt for next year, but the extent of the special debt to promote infrastructure construction is relatively limited. Real estate leading indicators of sales, financing, land purchase, new construction down, indicating a decline in investment.

From the perspective of market expectations, the current commodities are mainly trading in the direction of recession in the near future, black, non-ferrous and other futures prices have fallen significantly recently, coupled with the further decline of the tail warping factor of PPI in the second half of the year, PPI will still face greater downward pressure during the year.

5 it is suggested that we should strengthen counter-cyclical adjustment, lower MLF interest rate and guide real interest rate downward, continue to promote the market-oriented reform of interest rate, and open up the channel of wide currency to wide credit.

The current price data show distinct structural characteristics, mainly reflected in the differentiation of CPI between food and non-food, as well as the differentiation of CPI and PPI. As a lagging indicator, the August price data further confirmed the judgment of increasing downward pressure on the current economy.

Structural loosening of monetary policy will not exacerbate the current inflation problem. At present, the core reason why CPI remains high lies in the supply side of pork. In order to solve the problem of CPI, we should make efforts through the policy on the supply side. The use of financial subsidies and other means to support large farmers who withdrew from the market to help them resume production as soon as possible; speed up the release of frozen pork reserves; step up the development of safe and effective African classical swine fever vaccine.

Monetary policy mainly acts on the demand side, and increasing counter-cyclical regulation will mainly stimulate effective demand and prevent the economy from falling too fast. Pork demand is mainly affected by population, consumption preference, residents' income and other factors, and has remained stable in recent years.

Historically, pork consumption has not changed significantly as a result of changes in monetary policy. Therefore, increasing the countercyclical adjustment of monetary policy will not further push up pork prices, but will buy time for high-quality development by increasing effective demand, hedging against the rapid decline of PPI and core CPI, the decline of corporate profits and the rapid rise of real interest rates.

1) it is suggested to strengthen counter-cyclical regulation and pay attention to the synergistic effect of monetary, fiscal and industrial policies.At present, with the increasing downward pressure on China's economy, we should not only strengthen counter-cyclical regulation through fiscal and monetary policies, but also maintain strategic concentration to prevent flooding, and the most important thing is to unswervingly promote reform and opening up.

The pro-active fiscal policy should continue to promote the implementation of tax reduction and fee reduction, appropriately increase the limit of special debts according to actual needs, and monetary policy should continue to dredge the transmission mechanism from broad money to wide credit, and increase the structural reform on the financial supply side; the most fundamental thing is to expand reform and opening up, liberalize market access, restore entrepreneur confidence, and stimulate new growth points such as the new economy and the service industry. We will promote the steady and healthy development of the real estate market and establish a new housing system and long-term mechanism oriented by housing.

2) in terms of the total amount of monetary policy, it is suggested that the MLF interest rate should be reduced to guide the real interest rate downward and continue to promote the market-oriented reform of interest rate.

At present, the time is ripe to cut interest rates. Early-stage policy reserves have been relatively sufficient: from a practical point of view, banks can now accept the downward trend of lending rates. The first-time LPR pricing rate announced on Aug. 20 is only slightly lower than before. Considering the asymmetry of LPR, the asset side of the bank is not aimed at the debt side, and the asset side interest rate is not willing to be cut easily on the premise that the cost of the debt side does not fall.

LPR interest rate = MLF interest rate + bank plus point, in which the extent of increase depends on the bank's own capital cost, market supply and demand and risk premium and other factors, market supply and demand and risk premium are difficult to adjust in the short term, and the reserve reduction can significantly reduce the bank's own capital cost and bring about the downward LPR interest rate.

From a practical point of view, banks can accept the downward trend of lending rates at present. The first-time LPR pricing rate announced on Aug. 20 is only slightly lower than before. Considering the asymmetry of LPR, the asset side of the bank is not aimed at the debt side, and the asset side interest rate is not willing to be cut easily on the premise that the cost of the debt side does not fall. LPR interest rate = MLF interest rate + bank plus point, in which the extent of increase depends on the bank's own capital cost, market supply and demand and risk premium and other factors, market supply and demand and risk premium are difficult to adjust in the short term, and the reserve reduction can significantly reduce the bank's own capital cost and bring about the downward LPR interest rate.

At present, MLF interest rates are still at an all-time high, and there is plenty of room for interest rate cuts.We suggest that the LPR interest rate can be adjusted slightly for many times to reduce the impact of interest rate adjustment on the market, and micro-adjustments can be carried out in time according to the actual effect. We will continue to promote the marketization of interest rates in depth, improve the FTP pricing mechanism of financial institutions, and smooth the transmission mechanism of short-term interest rates to medium-and long-term interest rates.

3) in the monetary policy channel, great efforts should be made to dredge the monetary policy transmission mechanism and further dredge the credit channel, interest rate channel and asset price channel.Credit channels: from the source and supply-side forces. On the one hand, targeted reserve reduction is an important direction to transfer funds into sectors that need to be leveraged in the real economy, especially private enterprises, small and medium-sized enterprises and emerging industries. On the other hand, we should carry out structural reform on the financial supply side and effectively implement the due diligence clause, so that financial institutions have the ability and motivation to serve the real economy.

Interest rate channel: the key lies in the integration of interest rates. Practice shows that the interest rate channel helps to prolong the time of economic recovery, requires monetary policy to change from quantity to price, and strengthens the allocation of market-oriented resources. Through interest rate transmission, from reducing the policy interest rate to the lending rate to the real economy financing interest rate. Capital

In terms of production and price channels: it is suggested that we should vigorously develop multi-level capital markets, increase the proportion of direct financing, especially equity financing, and continue to promote Science and Technology Innovation Board to help the development of the new economy and attract more long-term stable funds to enter the market. further enhance the importance of asset price channels.

In the real estate market, promote the stable and healthy development of the real estate market, and establish a housing-oriented new housing system and long-term mechanism. The policy emphasizes "three stability", stabilizing land prices, stabilizing housing prices, and stabilizing expectations. "stability" is the main tone, which should neither be too loose nor too tight: on the one hand, we should prevent money from releasing water to stimulate the real estate bubble; on the other hand, we should also prevent taking the initiative to pierce and cause major financial risks. The mature country is to trade time for space and use the time window to promote the reform of housing system and long-term mechanism.

4) in terms of financial policy, innovative tools should replenish capital and strengthen support for small and medium-sized banks.At present, the transmission of monetary policy is not smooth, from the point of view of banks, in addition to liquidity, there is also a need for adequate capital support. Compared with the international, China's capital replenishment tools are more complete, but the capital tool supplement mechanism is not perfect. Liquidity such as perpetual bonds and preferred shares and the scope of investors need to be improved; the disposal mechanism of high-risk financial institutions needs to be improved, and the repayment order of capital instruments needs to be clearly defined to reduce investors' concerns. On the other hand, the credit supply of small and medium-sized enterprises of private enterprises is mainly small and medium-sized banks, so we need to strengthen the support to small and medium-sized banks, broaden their sources of capital and capital supplement, and then enhance the ability of small and medium-sized banks to serve private and small and micro enterprises.

5) in terms of fiscal policy, it is suggested that part of the new quota of special debt for next year should be issued as soon as possible, so as to support the economy through infrastructure construction and stabilize employment; the central government should increase leverage to reduce taxes and fees, so that micro-main bodies can be lightly loaded.The executive meeting of the State Council on September 4 clearly proposed that "the new quota of special debt for next year will be issued ahead of schedule in accordance with regulations." At present, there is still much room for improvement in China's urban and rural infrastructure, and raising the amount of special debt can be used as an active financial option. It is suggested that the policy should clearly issue part of the new quota of special debt for next year in advance to ensure that funds are allocated to the project in a timely manner.

In addition, it is suggested that the central government increase leverage and transfer the leverage of enterprises and residents, including measures to reduce taxes and fees for enterprises and residents on a large scale; to establish social security accounts to improve the level of social security for residents, so that residents can spend at ease; to liberalize controls on industries such as automobiles, finance, telecommunications, and medical care; to partially purchase corporate debt with equity pledge risks; and to allocate some good assets for mixed reform.