Let me explain to the brothers: how money is generated. As mentioned earlier, there are mainly three ways:
First is 'printing' money, meaning that central banks of various countries physically 'print' currency;
Second is 'borrowing' money, which refers to the 'derivative currency' created by banks lending and leveraging;
Third is 'creating' money, which is the currency generated through quantitative easing policies that 'release water'.



The issuance of currency by the central bank is done through rediscounting, loans, purchasing securities, acquiring gold, foreign exchange, etc., to inject into the market, thus forming the base currency in circulation.

The statistical bureau might be the hardest working department in the past six months. The data for the half-year is out, and it looks like the macro economy and social financing data are quite good, with the market generally reaching a consensus that there will be no stimulus policy in the third quarter.

Is it really that good?

Now let's look at the current overall economic situation:

01. First, let's look at macroeconomic data:

GDP: In the first half of the year, the domestic production value grew by 5.3% year-on-year. The first quarter grew by 5.4%, while the second quarter grew by 5.2%, a decline.

Industrial added value above designated size: In the first half of the year, the national industrial added value above designated size grew by 6.4% year-on-year. In June, it grew by 6.8%, and in May, it grew by 5.8%, an increase.

Fixed asset investment: In the first half of the year, national fixed asset investment (excluding households) grew by 2.8% year-on-year. In June, it was -0.1% year-on-year, while in May it was 2.7%, a decline.

Total retail sales of consumer goods: In the first half of the year, total retail sales of consumer goods grew by 5% year-on-year. In June, it grew by 4.8%, and in May, it grew by 6.4%, a decline.

Infrastructure investment (excluding electricity): In the first half of the year, infrastructure investment (excluding electricity, heat, gas, and water production and supply industries) grew by 4.6% year-on-year. In June, it was 2.0% year-on-year, while in May it was 5.1%, a decline.

Real estate development investment: There is currently no publicly available overall year-on-year data for the first half of the year, but from January to June monthly data, real estate development investment has continued to decline year-on-year, with June at -12.9% and May at -12.0%, a decline.

Real estate sales area: There is currently no publicly available overall year-on-year data for the first half of the year, with June at -5.5% year-on-year and May at -3.3%, a decline.

Real estate sales amount: There is currently no publicly available overall year-on-year data for the first half of the year, with June at -10.8% year-on-year and May at -6.0%, a decline.

Manufacturing investment: In the first half of the year, manufacturing investment grew by 7.5% year-on-year. In June, it was 5.1% year-on-year, and in May, it was 7.8%, a decline.

Imports and exports (in USD): In the first half of the year, the import and export of goods grew by 2.9% year-on-year. Exports grew by 7.2%, and imports decreased by 2.7%. In June, exports grew by 5.8%, and in May, it was 4.8%; in June, imports grew by 1.1%, and in May it was -3.4%, an increase.

The three drivers of GDP still rely on the investment side, meaning the supply side is supporting it, with funding sources relying entirely on government debt; exports are temporarily stable, mainly due to tariff delays, and the rush to export effect is filling in; domestic demand is insufficient, and a slight stop in replacing the old with the new leads to a sharp drop in social consumption.

Let’s first talk about the supply-side issues:

After the pandemic, industrial added value above designated size has maintained high growth, but the PPI has continued to decline. In fact, the PPI has been falling for 33 consecutive months.

In June, industrial added value above designated size grew by 6.8% year-on-year, an increase of 1 percentage point; PPI fell by 3.6% year-on-year, a decline of 0.3 percentage points; the divergence between the two has further widened to over 10 percentage points.

The continuous decline of PPI represents overcapacity in the upper and middle reaches.

Next are the demand-side issues:

Here, I want to mention the detailed data on social consumption, which is very counterintuitive. In June, retail sales of goods and catering revenue grew by 5.3% and 0.9% year-on-year, respectively, down by 1.2 and 5.0 percentage points from the previous month;

In retail above designated size, communications equipment, home appliances and audio-visual equipment, furniture, and cultural office supplies grew year-on-year by 13.9%, 32.4%, 28.7%, and 24.4%, respectively, with changes of -19.1, -20.6, 3.1, and -6.1 percentage points from the previous month.

In retail above designated size, sales of tobacco, alcohol, and beverages decreased by 0.7% and 4.4% year-on-year, down by 11.9 and 4.5 percentage points from the previous month.

I do not understand which group of people cannot even afford to eat but are desperately buying furniture, home appliances, phones, and tablets.

Strangely, in June, social retail grew by 4.8% year-on-year, but the CPI year-on-year growth rate was only 0.1%. Generally speaking, strong consumption means strong demand, which would lead to rising inflation.

However, from the performance of quantity and price divergence in the first half of the year, it can be seen that current market demand is still sluggish, capacity is still excess, and it remains in a difficult clearing cycle of exchanging price for volume.

I cannot understand it, nor can I comprehend it.

To summarize: Economic growth is slowing, supply-side overcapacity, insufficient domestic demand, money has not been printed less, but prices are sluggish, indicating that money has not entered the real economy.

02. Now let's look at financial data:

M2: There is currently no publicly available overall year-on-year data for the first half of the year, with June at 8.3% year-on-year and May at 7.9%, an increase.

Social financing: There is currently no publicly available overall year-on-year data for the first half of the year, with June at 8.9% year-on-year and May at 8.7%, an increase.

CPI: In the first half of the year, the national consumer price index (CPI) fell by 0.1% year-on-year. In June, it was 0.1% year-on-year, and in May, it was -0.1%, an increase.

PPI: In June, the national PPI was -3.6% year-on-year, and in May, it was -3.3%, a decline.

Throughout this entire half of the year, the stability of social financing relied on government debt.

As market entities, corporate and resident loans have not seen much increase, with new resident loans from January to June showing a downward trend year-on-year, indicating a lack of confidence in the resident sector.

The only bright spot is short-term corporate loans, the reason for which is unclear.

Most importantly, the money that has been released has not reached the residents; the balance of resident loans as a proportion of social financing continues to decline, having dropped to 19.52%, falling for 21 consecutive months, and remaining below 20% for five consecutive months.

Where has the money gone? In fact, more than 60% of social financing is from government and state-owned enterprises, followed by loans from large manufacturing enterprises. In other words, the high growth of money each year flows more into the government side and investment areas, and less into the resident side and consumption areas.

Less capital flowing into the resident side cannot boost consumption, while more capital flowing into the government side and state-owned enterprises means that the government, lacking market mechanism adjustments, concentrates investments. Upstream coal, steel, cement, and other capacities controlled by central state-owned enterprises are generally in overcapacity, leading to continuous price declines and prolonged deflation.

As for deposits, in June of this year, residents' deposits and corporate deposits increased by 2.47 trillion and 1.78 trillion, respectively, with year-on-year increases of 0.33 trillion and 0.78 trillion.

The 2.47 billion new deposits from residents is quite astonishing, with a cumulative increase of 10.77 trillion in the first six months; however, new loans were only 597.6 billion. Combining past data estimates, the loan-to-deposit ratio for residents in the first six months was 9.21.

This represents that residents are unable to obtain loans while desperately saving, which is a typical contraction manifestation. Of course, it could also be a funding allocation issue, which is not convenient to elaborate on here.

Overall, the structure of social financing is characterized by 'government strong, residents weak', 'deposits strong, loans weak', and 'short-term loans strong, long-term loans weak'.

03. Finally, let's look at fiscal data:

Unlike economic and financial data, fiscal revenue has been in negative growth since last year. Generally, GDP and revenue tend to move in the same direction, and for a long time, the growth rates of China’s GDP and tax revenue have been consistent. From 2010 to the third quarter of 2018, the average deviation between the two was only about 2 percentage points.

However, starting from the fourth quarter of 2018, the average deviation between the two began to widen to about 9 percentage points.

In the first half of this year, the actual year-on-year growth rate of GDP was 5.3%, while (from January to May) tax revenue fell by 1.6% year-on-year, leading to an exaggerated deviation of 6.9 percentage points.

The decrease in fiscal revenue indicates one problem: under the condition that the total economic volume remains unchanged, the profits generated from economic activities have decreased, which means that economic efficiency has worsened.

We have analyzed the economic situation from the three aspects of macroeconomics, financial data, and fiscal data, and the conclusion is that the total economic volume is acceptable, but there are significant structural problems, with excessive money on the supply side leading to overcapacity, and insufficient domestic demand on the resident side, resulting in a decline in economic efficiency.