Morgan Stanley Fixed-China Economics Bull vs. Bear Social Dynamics Indicator an...-110407692

M IdeaChina Economics | Asia PacificBull vs. Bear: Social Dynamics Indicator and Policy Tipping Point Morgan Stanley Asia LimitedRobin XingChief China Economist Robin.Xing@morganstanley.com +852 2848-6511 Jenny Zheng, CFAEconomist Jenny.L.Zheng@morganstanley.com +852 3963-4015 Zhipeng CaiEconomist Zhipeng.Cai@morganstanley.com +852 2239-7820 Harry ZhaoEconomist Harry.Zhao@morganstanley.com +852 2239-7229 We believe Beijing is slowly shifting policy to support social welfare and housing, but that the pace will be gradual: Our proprietary Social Dynamics Indicator has deteriorated but not yet reached the previous thresholds seen in late 2022 or late 2015, when an outright policy pivot took place. To bring you a variety of perspectives, we have picked several charts that consider both bull and bear arguments for China's economy: • Bull arguments: Both auto and home appliance sales picked up with the rollout of consumer goods trade-in program. Pace of govt. bond issuance accelerated from Aug, and the annual quota can be used up by Oct if the current speed can be maintained, opening the possibility of supplementary budget in late Oct NPC Standing Committee meeting. • Bear arguments: While we believe Beijing will gradually shift towards supporting social welfare and housing with fiscal policy, perceptions of social risks may prompt more decisive policy pivot, given policymakers’ focus on social stability. Thus, we launch the Social Dynamics Indicator, which aims to gauge social impact of economic performance and identify potential thresholds for policy tipping point – It has deteriorated from 2Q but has not reached the previous thresholds seen in 2H22 (prolonged Covid lockdowns) or late 2015 (4th year into PPI deflation), when an outright policy pivot took place. Evident of this, PBoC unexpectedly held off a rate cut following the Fed's 50bps rate cut, probably on concern at still large US-China rate differentials and bank profit margin, and we expect only 20bps of cuts in 4Q24.For important disclosures, refer to the Disclosure Section, located at the end of this report.September 20, 2024 09:52 AM GMTM Idea2Bull ArgumentsM IdeaMorgan Stanley Research3Incrementally Faster Fiscal RolloutThe pace of govt. bond issuance accelerated in August, with net monthly financing amount hitting a two-year high of Rmb1.6trn in August (18% of annual quota). If govt. bond issuance can be sustained at August's pace, the remaining annual quota (~33%) could be used up by October, opening up the possibility of a supplementary budget. Meanwhile, YoY home appliance sales turned positive in August (3.4% vs. -2.4% in July), and that of CPCA auto volume sales hit a 10-month high of 18% in September. MTD, likely reflecting the accelerated rollout of consumer goods trade-in program. Source: CEIC, Wind, Morgan Stanley Research0%10%20%30%40%50%60%70%80%90%100%JanFebMarAprMayJunJulAugSepOctNet Govt. Bond Issuance (% Share of Annual Quota)20232024Annual Quota Usage by