Overcapacity is still at a high level. The industrial economy has a prominent structural contradiction in the first quarter.
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Through investigation, we found that the structural contradictions in China's industrial economy in the first quarter are still outstanding.
The data in this paper is based on a quarterly survey of the operating conditions and financing needs of approximately 2,000 industrial enterprises above designated size. The survey was conducted in the form of telephone interviews. The samples were generated by random sampling of industries, regions and scales of enterprises above the scale of the 2008 national economic census (ie, sales of more than 5 million yuan).
It is worth emphasizing that although our survey is only for industrial enterprises with sales of more than 5 million yuan, sales of 5 million yuan is not a very high threshold, covering most industrial enterprises. Industrial enterprises account for nearly 50% of GDP in addition to agriculture, real estate, and finance.
New phenomenon in the first quarter
Through research, we found that our economy has the following phenomena in the first quarter:
1. The industry has not yet emerged from the bottom.
Although the statistics of the Bureau of Statistics show that GDP growth in the first quarter exceeded expectations and industrial growth was strong, our survey found that the industry has not yet bottomed out. In the first quarter, the industrial prosperity index was 47. Although it rose by one point from the previous quarter, it was still in a slight contraction. Overcapacity continues to be the highest in history.
The industry sentiment index for the first quarter was mainly dragged down by investment. When asked if “currently is a good time for fixed asset investmentâ€, only 1% of enterprises think “yesâ€, 74% of enterprises are “generalâ€, and 25% of enterprises answer “noâ€, and the corresponding diffusion index is 38, still far below the 50 points of glory. Correspondingly, only 8% of companies have invested in fixed assets in the first quarter. Expanded investments are even rarer, accounting for only 2%.
2. Prices and costs continued to rise, but the increase was less than the previous quarter.
Product prices continued to rise in the first quarter, involving 30% of companies, with a diffusion index of 64 (similar to the previous quarter: 66). The price increase was significantly slower than last quarter, and the proportion of companies with large price increases (greater than 10%) was much lower than the previous quarter (5%; last quarter: 20%). However, the proportion of companies with prices rising by more than 5% is similar to that of the previous quarter, still high, at 21% (previous quarter: 25%). Under the loose monetary policy, over-currency will inevitably create inflationary pressures. This will increase the production costs of enterprises and will be unfavorable to the recovery of the industry before the excess capacity is cleared.
Unit costs rose in the first quarter, involving nearly half (48%) of companies, with a diffusion index of 74 (previous quarter: 73). The increase in unit costs has eased from the previous quarter. Raw materials and labor costs have risen significantly, with diffusion indices of 70 and 65 respectively (both 72 and 65 in the previous quarter).
The rising cost is still an important reason for the price increase. As shown in Figure 1, among companies with product prices rising by more than 5%, companies with unit costs rising by more than 5% and 10% accounted for 87% and 8%, respectively, much higher than the overall sample (21% and 2%). . This is mainly due to the rising cost of raw materials, which accounts for 16% of the cost increase of more than 5%, three times the total sample (5%). At the same time, companies with large price increases are similar to the overall sample in terms of changes in production volume and overcapacity. All of this shows that inflation is mainly due to rising costs, not demand.
3. The production volume diffusion index was flat.
The production volume diffusion index was flat (50) in the first quarter after the first expansion of production in the fourth quarter of last year. The expansion of industrial production in official data is mainly due to the pull of state-owned and foreign-funded enterprises, both of which have a diffusion index of 53. Correspondingly, the production volume of large enterprises is expanding (the diffusion index is 53). The vast majority of private enterprises, industrial enterprises, did not expand in production compared with the fourth quarter of last year.
4. The gap between state-owned and private enterprises has expanded.
The gap between state-owned and private enterprises is worthy of attention. As shown in Figure 2, the advantages of state-owned enterprises in the prosperity index and business conditions for private enterprises have expanded in the near future. Production and investment have outperformed private companies in the fourth quarter of last year after reducing capacity in the past two years.
Finally, the recent increase in exports has been mainly due to the significant decline in exports from state-owned enterprises last year, which is a significant increase. The export of private enterprises did not shrink last year, and it was also flat in the first quarter. As private enterprises account for the vast majority of industrial enterprises, the overall export volume index is also flat.
5. The pulling effect of real estate on the economy is not enough to explain the rise in industrial production in the first quarter.
Recent discussions on industrial production in the first quarter have considered real estate and infrastructure to play an important role. However, companies directly related to real estate, such as cement, construction-based metal products, steel, and coal, account for a small proportion, accounting for only 6% of the overall sample. Moreover, most of them are still in a sluggish state: except for architectural metal products, the diffusion index is lower than the overall level. Production is flat to small contraction. At the same time, their overcapacity is still higher than the overall sample.
Challenges and priorities 1. Industry distribution:
The top three booming indices are water production and supply (62), pharmaceutical manufacturing (59) and electricity, thermal production and supply (57). Among them, the pharmaceutical manufacturing industry has been ranked in the forefront of the industry sentiment index since the first quarter of 2015. The last five quarters of this quarter are non-metallic mineral products (39), non-metallic mining and mining industry (40), leather, fur, feathers and their products and footwear (40), wood processing and wood, bamboo, rattan, brown , grass products industry (42) and petroleum processing, coking and nuclear fuel processing industry (42). In the nine quarters since the first quarter of 2015, non-metallic mining was selected seven times, of which four quarters ranked first. The oil processing, coking and nuclear fuel processing industries and leather, feather and footwear industries are also on the list seven times.
2. Challenges:
Overcapacity continues to be the biggest challenge facing the industrial economy. Followed by labor and raw material costs and policies.
In the first quarter, 67% of corporate products were oversupplied in the domestic market, which was basically the same as last quarter. The diffusion index, which reflects insufficient domestic demand, was 83, maintaining its highest point in history for the fifth consecutive quarter. One-third of companies said that overcapacity exceeded 10% (previous quarter: 32%), and 13% of companies had overcapacity of over 20% (previous quarter: 14%). And companies do not think that the excess level will improve in the next quarter.
The second biggest challenge for the industrial economy is that the cost increase has become more prominent since the fourth quarter of last year as the cost of raw materials and labor has risen.
Finally, financing has not been the bottleneck of the industrial economy at this stage since we started this survey in the second quarter of 2014. Only 3% of companies in this quarter considered financing to be a constraint (3% to 4% in 2016). Correspondingly, only 4% of enterprises believe that funds are insufficient, while the vast majority of enterprises with insufficient funds (96%) are productive, not expansion funds are insufficient, and 3% are caused by losses. All of this means that in the context of overcapacity, loose monetary policy can not really boost the industrial economy.
Although GDP growth exceeded expectations in the first quarter and industrial growth was strong, our survey showed that the industry has not bottomed out. Although the overall production volume has increased, it is driven by state-owned and foreign-funded enterprises, while the majority of private enterprises, industrial enterprises, have not expanded their production. Prices and costs continued to rise significantly, although the increase was less than the previous quarter. In addition, the gap between state-owned and private enterprises in terms of prosperity index, business status and investment has expanded, which deserves attention.
The biggest challenge facing the industrial economy is still overcapacity. The coverage and severity of overcapacity are at historically high levels.
These findings indicate that the structural problems of the industrial economy are still relatively serious. This year's supply-side reforms should still focus on de-capacity, while promoting industrial upgrading and improving overall competitiveness. In addition, in the context of overcapacity, loose monetary policy can not really boost the industrial economy. The inflationary pressures in the past two quarters are obvious, which is not conducive to industrial recovery.
(The author is the vice president of Changjiang Business School and the director of the Center for Financial and Economic Development)
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