As we navigate through a global economic landscape that appears to be undergoing significant shifts, it has become increasingly pertinent to analyze the underlying factors affecting economic stability in countries like ChinaRecent trends suggest that despite a notable decline in domestic inventories, the risks associated with economic downturns seem relatively manageableHistorical data have shown that actual interest rates often correlate inversely with inventory behaviors, suggesting that as economic conditions pivot, so too do inventory levels and business confidenceFor example, by the end of 2023, actual interest rates have decreased from a historical peak of 9.9% in June to 7.1%, reinforcing the notion that a recovery period is on the horizonIn conjunction with this, a rising capacity utilization rate, which has climbed from 74.3% to 75.9% over the last three quarters, indicates that manufacturing and economic activities are gaining traction.

Internationally, the economic tides are shifting as the United States begins a replenishment phase in its inventory cycles, which could rejuvenate demand for Chinese exports

Certain sectors within the U.Shave initiated restocking, with actual inventory growth among retailers rising from 6.3% in June 2023 to 8.5% by January 2024. Notably, this replenishment is not uniform across sectors; it has been particularly strong in transportation, chemicals, metals, and the textile and apparel industriesBeyond mere restocking, improvements in U.Sreal estate can also positively influence Chinese exports related to furniture and machinery, providing further impetus for economic revitalization.

Fiscal measures have also played a crucial role in supporting economic activity through targeted government expenditureThe degree of economic recovery is closely tied to the force of fiscal support; projections for 2024 indicate a rise in general fiscal budget expenditure growth to 7.9%. This is significantly above the implicit nominal GDP growth rate of 7.4% derived from a 3% budget deficit target, signaling that fiscal support aimed at the economy is set to intensify

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The government has also introduced quasi-fiscal tools like the PSL (Pledged Supplementary Lending) and technologic reform relending initiatives, which historically have shown to provide robust support in areas of focus.

The initial macroeconomic data for the year showcased encouraging results, largely influenced by the so-called “working day effect.” Specifically, during the first two months of the year, industrial production and investment demand displayed significant growth compared to expectationsThe industrial output was particularly emphasized with its increased efficiency correlated to the number of operational days - January and February 2024 had 40 working days, the highest since 2010, which were two additional days compared to 2023. This phenomenon, referred to as the “working day effect,” positively contributed to the overall economic output, magnifying specific year-over-year metrics.

However, the slower-than-anticipated realization of microeconomic activity can be attributed to various external disruptions, including extreme weather conditions and delays in issuing new special bonds

The resumption of work after the holiday coincided with severe freezing rain, which hindered human mobility and affected productivity within the construction sectorReports from January and February indicate that the asphalt utilization rate plunged to low levels, alongside a year-on-year decline of 7% in grinding working ratesFurthermore, the sluggish pace of newly issued special bonds, which only accounted for 16.3% of the annual quota in the first quarter - significantly lower than the historical average of around 40% - compounds these challenges.

It is crucial to emphasize that until a stable recovery state is attained, the government will likely maintain its focus on policies aimed at economic growth, continuing a robust approach to counter-cyclical regulatory measuresThe ephemeral increase in data driven by the working day effect will not alter the prevailing policy orientation

Drawing from recent history, particularly in the latter half of 2020 where economic recovery coincided with rising general fiscal expenditures and social financing growth, it is plausible that further incremental policies will be introduced should economic pressures intensifyFor instance, similar to the launch of policy financial instruments in the third quarter of 2022 and the revival of PSL initiatives.

The overall economic growth target, as calculated using the production method, should not pose substantial difficulty in achieving, with GDP projected to grow by 5.2% year-over-yearIn terms of the secondary sector, the robust performance of intermediary equipment manufacturing has emerged as a key driver, anticipated to yield an output increase of 8%, with revenues surpassing the processing and smelting sectors at 42%. The synergy between inventory cycles and equipment upgrades suggests that manufacturing may continue to thrive, potentially facilitating a 4.5% increase in secondary sector GDP year-on-year

On the demand side, the inception of the restocking phase might contribute an additional 0.1 to 0.4 percentage points to year-over-year GDP growth.

Moreover, the tertiary sector is poised to further enhance its economic contribution, as there is a tendency to overestimate the impact of real estate's drag on overall economic performance while underappreciating the burgeoning investment in emerging services like information softwareFor instance, in 2023, the value added from information software surged by 12%, accounting for 8% of the tertiary sectorIn contrast, real estate's share has declined to 10.7%. Anticipating into 2024, despite limited improvements in real estate sales, its direct effect on tertiary GDP is expected to drag approximately 0.1 percentage points, although a rebound in production and consumption could lead to an estimated 5.7% growth in tertiary GDP year-over-year.