Changes in the Global Economic Structure and Investment Trends

Title context: Changes in the Global Economic Structure and Investment Trends Text: Global economic growth and CKH HOLDINGS investment have undergone significant changes recently. In terms of each country's share of global GDP, the United States ranks first and China second. From the perspective of global investment, recent attention has focused heavily on U.S. Treasury yields and Federal Reserve rate hikes, which reflect both debt issues and marginal changes in technology, investment, and economic growth. Global Economic Structure and U.S. Rate Hikes 1. Changes in the Global Economic Structure Changes in global economic growth and CKH HOLDINGS investment have not only attracted attention domestically, but have also seen major changes overseas. In terms of each country's share of global GDP, the United States has the highest share, while China ranks second. China currently accounts for close to 17% of the global economy. Japan's share of the global economy has declined markedly. From the perspective of the internal economic structure, this can be observed through two aspects: the share of manufacturing and the share of services. China's manufacturing share is relatively high, and the gap it needs to close in the future is mainly reflected in services, where the current share is relatively low. From the perspective of global investment, recent attention has focused heavily on U.S. Treasury yields and Federal Reserve rate hikes, which reflect both debt issues and marginal changes in technology, investment, and economic growth. Looking at the ratio of U.S. and Japanese government debt to GDP, Japan is at a relatively high level, and U.S. government debt as a share of GDP is also close to 100%. This is also an important reason why this round of rate hikes has had a relatively large impact on U.S. Treasuries. From the perspective of the global inflation cycle, we are currently roughly in the second inflation cycle since 2020. However, considering that oil prices have not yet returned to their 2022 highs, this round of inflation has also not reached the previous peak in terms of CPI. In 2022, CPI in major countries such as the United Kingdom once reached around 10%, while in this round CPI in major countries remains in the 3%4% range. From the perspective of global benchmark interest rates, after a relatively rapid round of rate hikes in 2022, the rate cuts in 20232024 have only reversed about half of the increase. Global interest rates are currently basically at a relatively neutral level, and there is still some possibility of further increases in the future. 2. U.S. Rate Hikes, Employment, and AI Investment Recently, market expectations for rate hikes have been relatively strong. Looking only at U.S. data, employment and inflation have performed relatively better than expected. Breaking down U.S. nonfarm payroll data, U.S. employment growth was relatively strong in July and August, mainly from leisure and hospitality, services, and government. However, two industries have continued to show negative employment growth: information and finance. From this, it can be seen that AI substitution for some U.S. jobs has already appeared and has persisted for some time, which may also become a potential hidden risk for U.S. economic growth. In terms of economic growth, U.S. GDP growth was 1.5% in the second quarter and about 2% in the first quarter. The market is currently paying close attention to AI investment, especially AI capital expenditure, and there has already been considerable divergence in views on the outlook for U.S. AI investment. Over the past period, AI investment has had a fairly obvious pulling effect on total U.S. investment and economic growth. AI investment accounts for 60% of U.S. corporate investment and close to 10% of U.S. GDP, overall at a relatively high level. However, in terms of the month-on-month growth rate of AI investment, there has already been some downside risk this year. In particular, cash flow at several large U.S. technology companies has turned negative, and combined with the impact of high interest rates on the U.S. debt market, the market has certain concerns about the growth of U.S. technology companies and related industries at the end of this year and early next year. On the other hand, in terms of inflation, although U.S. CPI and core CPI have shown some signs of peaking and falling back, Warsh said in a speech on Thursday that inflation is still "too high, too long," and argued that the Fed's most important current goal remains bringing inflation back down. The logic behind this judgment is that Warsh believes U.S. economic growth is currently relatively stable, so controlling inflation is more important. After the U.S. rate hike in September, the market expects another possible rate hike in October and December. This rate hike brought the policy rate to 3.75%4%, and the next one may push it further to 4%4.25%, leading to a sharp rise in U.S. Treasury yields. Recently, U.S. Treasury yields have fluctuated sharply. On the day of the rate hike, Treasury yields actually declined somewhat, then rose again. At present, the 10-year U.S. Treasury yield is still at a high level of around 5%. The reason U.S. Treasury yields have been slow to fall is mainly that the market worries the Fed will continue raising rates in the future. From the dot plot, there is still a possibility of further rate hikes before the end of 2027. As to whether high U.S. Treasury yields will affect U.S. fiscal conditions and fixed asset investment, Warsh responded more from the perspective of households' real income, arguing that low-income groups hold fewer financial assets, and that rate hikes help control inflation and raise real incomes. He did not directly respond to the impact of high rates on U.S. Treasuries and U.S. equities. Overall, the relatively rapid investment and economic growth driven by large U.S. technology companies and AI investment over the past two years faces greater uncertainty in the future. The risk of high interest rates, combined with uncertainty in corporate profits and cash flow, may pose relatively large potential risks to the U.S. economy and capital markets at the end of this year and early next year. Domestic Economic Performance and Policy Direction 1. Consumption This year is a stage in which nominal growth has recovered relatively quickly. Whether the economy can stabilize and rebound in the third quarter still needs further observation. From the perspective of the three drivers of the economy, consumption is currently more prominent in importance. Whether it is building a domestic grand circulation or connecting upstream and downstream transmission, the core bottleneck at present still lies in consumption. Related consumption growth from January to August was 1.1%, and from January to July it was 1.2%. Consumption of goods related to trade-ins of consumer goods has grown relatively quickly, but this policy also has a certain structural impact. It has helped some categories included in the policy scope relatively more, while growth in other categories not included in the scope has been relatively low. At the same time, the pace of policy implementation can also disturb related consumption. For example, at the end of the second quarter and the beginning of the third quarter, the Ministry of Finance issued the third batch of funds in advance, and consumption rebounded noticeably in June, but weakened marginally again in July and August. Among consumer categories, pressure on automobile consumption is relatively large; growth in communication equipment is relatively high, but this is mainly affected by price increases in AI-related products, which may reflect more of a price contribution. In the entire 15th Five-Year Plan, the first document issued by the central government is the "Consumption Plan Outline," which also reflects the importance of consumption. If the goal of 60 trillion yuan by 2030 is to be achieved, the average annual growth rate needs to reach more than 3.7%, so there is still certain pressure, and in the future multiple measures will be needed to effectively stabilize consumption and demand. 2. Manufacturing From the perspective of profit divergence, differences among upstream, midstream, and downstream industries are currently quite obvious. Among the more than 20 first-level industry classifications of the National Bureau of Statistics, currently only about 56 industries have achieved positive profit growth, and these industries are highly correlated with capital market hotspots in the first half of this year, mainly concentrated in resource products and technology, such as coal, chemicals, chemical fibers, and electronics, where profit growth is relatively high. At the same time, many midstream and downstream manufacturing industries still face relatively large pressure, including automobiles, as well as downstream consumer services, liquor, food, and pharmaceuticals. 3. Real Estate From the perspective of real estate, the divergence remains obvious. First-tier cities are generally performing relatively well, especially Shanghai, but in major large and medium-sized cities and second-tier cities, especially provincial capitals, related indicators remain below the levels of previous years, and the regional divergence in the real estate market recovery is still relatively large. In terms of housing prices, whether for new homes or second-hand homes, the year-on-year decline has narrowed somewhat, but there is still some distance to go before the expectation of falling housing prices is completely reversed. A relatively important issue is how to further reduce real estate inventory. 4. Infrastructure and the "Six Networks" From the perspective of infrastructure, cumulative year-on-year growth is still negative. In terms of the use of special-purpose bonds, although the overall scale of special-purpose bonds last year was relatively high, the proportion actually used for investment was instead lower than in 2023 and 2024, with more funds used for debt resolution. Therefore, infrastructure investment requires, on the one hand, accelerating the issuance of special-purpose bonds, and on the other hand, further increasing the proportion of special-purpose bonds used for project investment. Another issue in the field of fixed asset investment that has recently attracted more attention is the "Six Networks." The construction of the "Six Networks" is very important, especially as the scale of policy-based financial instruments has increased this year, and it is also an important policy focus for promoting a return to positive growth in fixed asset investment in the remaining time this year. 5. Exports From the perspective of exports, overall performance is currently relatively stable. In the first eight months of this year, exports maintained growth of more than 20%, reflecting the resilience and advantages of China's industrial chain. From the perspective of industry distribution, structural characteristics are very obvious. Exports of high-technology-related products such as integrated circuits and mechanical and electrical products have grown relatively quickly. Although other traditional industries are relatively lower, it is still not easy for them to maintain overall single-digit or double-digit growth. This is influenced both by changes in export regions and by changes in the structure of exported goods. Overall, export growth this year is still expected to maintain double-digit or higher growth. 6. Fiscal Policy From the perspective of policy, this year's fiscal budget is generally relatively proactive. From a historical perspective, China's fiscal deficit ratio has not continued to rise every year. Even if the fiscal deficit ratio rose on a one-off basis in 2020, the deficit ratio subsequently declined in 2021 and 2022. However, after the fiscal deficit ratio already rose substantially last year, it remains at a relatively high level this year, so the overall tone of fiscal policy this year is still very proactive. 7. Monetary Policy From the perspective of monetary policy, since the Shanghai Lujiazui Finance & Trade Zone Development forum in June, the central bank has carried out a series of structural adjustments to monetary policy, including shortening the interest rate corridor and creating an "overnight reverse repo rate." Overall, short-term interest rate movements are becoming increasingly stable. What is more worth watching now is how to achieve effective transmission from short-term interest rates to medium- and long-term interest rates. The traditional interest rate transmission mechanism mainly transmits from the central bank benchmark rate to LPR, and then to credit rates. Judging from the central bank's first-quarter monetary policy report and the pilot programs at some regional banks in July, a transmission path may also form in the future from the central bank's short-term rate to money market rates, and then to loan rates. Further diversification of the loan pricing mechanism will help continue to reduce financing costs for the real economy. As for the current aggregate financial indicators, although money growth and loan growth have declined to some extent, with financial innovation, especially the advancement of debt resolution policies in recent years, if observing changes in aggregate finance, consideration can be given to combining loans and bond financing for observation, which may provide a stronger explanation for the macroeconomy. Capital Market Analysis and Outlook 1. A-shares: Monetary Expansion, Market Divergence, and Valuation Reversion Since the beginning of this year, looking at the domestic A-share market, especially after "9/24" last year, monetary expansion has driven gains in the domestic capital market. From the relationship between the CSI 300, the Shanghai Composite Index, and M1 and M2, as money growth rose, stock market valuations increased markedly. Next, as the rise in valuations gradually comes to an end, more attention needs to be paid to marginal changes in corporate earnings, including PPI and export growth. From the historical relationship between PPI and the EPS of listed companies, there is a relatively high correlation between listed company profit growth and PPI. If PPI can continue to maintain relatively high growth and drive a recovery in listed company profits, then in the next stage stock market pricing may gradually shift from valuation to earnings. The current market is clearly divergent, and in particular changes in the market landscape brought by AI have attracted more attention. First, technological progress in the AI era plays a certain role in raising total factor productivity. With the expansion of AI applications and investment, profit growth has also driven the rapid development of related industries. However, from a longer-term perspective, the entire capital market still faces the issue of valuation reversion. Excessively high valuations in some industries are difficult to sustain over the long term. In the future, it is still necessary to see further recovery in traditional industries, consumer industries, and cyclical industries, so that overall capital market valuations become more reasonable and a more stable and sustainable capital market can be formed. 2. Interest Rate Market: Domestic and International Rate Spreads and the Yield Curve From the perspective of the interest rate market, major overseas economies are affected by high debt and high inflation, and interest rates have generally risen. However, considering that China is still in a debt resolution cycle, monetary policy remains relatively accommodative, and the RMB exchange rate is relatively stable, the domestic interest rate market may still maintain a relatively accommodative trend with moderate declines. In terms of the shape of the yield curve, the medium- and long-end curve is currently relatively steep, and long-term interest rates may still decline in the future, with the entire yield curve eventually tending to become flatter. 3. Commodities: Crude Oil and AI-Related Commodities Perform Relatively Well From the perspective of commodities, crude oil has performed relatively well this year. Apart from crude oil, driven by AI and technological development, commodities such as copper may still have some upside. However, prices of commodities related to traditional investment, such as ferrous metals and steel, remain under some pressure. Precious metal prices may be suppressed by further Fed rate hikes, so gold prices may show high-level fluctuations. 4. RMB Exchange Rate: China-U.S. Rate Spread and RMB Internationalization Recently, the RMB exchange rate broke through 6.7, and the market is paying relatively close attention to whether the RMB exchange rate should refer more to the trade surplus or to the China-U.S. interest rate spread. From a historical perspective, the balance of payments has a relatively larger impact on the exchange rate. At present, the 10-year U.S. Treasury yield is about 5%, and the 10-year Chinese government bond yield is about 1.6%. The China-U.S. rate spread is relatively large, but this spread is more affected by differences in economic structure and economic cycles between China and the United States. From the perspective of the exchange rate itself, considering the continuously rising global use of the RMB and a relatively healthy balance of payments with a surplus of a certain scale, the RMB exchange rate may overall still maintain a relatively strong trend. However, an excessively one-sided market should not be allowed to form, so this year's RMB exchange rate is judged to be in the 6.66.8 range. From a longer-term perspective, C FIN INT INVization and RMB internationalization are the more important logic driving the development of China's financial assets. If the scale and proportion of global RMB use rise further in the future, this will provide greater support for RMB-denominated assets, including equities and bonds. Therefore, we still hold a relatively positive attitude toward the medium- and long-term development of RMB internationalization. This article is reprinted from the "China Macroeconomics Forum CMF" WeChat public account, author: Ming Ming; GMTEight editor: Xu Wenqiang.