The recent release of April's economic data has added more complexity to the macroeconomic outlook. The price index for goods and production materials hit a one-year high, signaling a sudden rise in inflationary pressures, while the industrial growth rate exceeded expectations, suggesting that economic growth may have already peaked. Meanwhile, the spread of the sovereign debt crisis in Greece and other European countries, along with the continued weakening of the euro, is expected to negatively impact China's exports. These factors have made it increasingly difficult to assess the overall economic situation.
In response to potential inflation risks and an overheating economy, the government has introduced several regulatory measures, including raising the deposit reserve ratio by the central bank, issuing 50-year bonds, and implementing new real estate regulations under the "National Ten" policy. At the start of the year, the central government described the economic outlook as "more complicated," but it now seems that the actual complexity has surpassed initial expectations.
Why is this the case? Two major factors could exceed previous forecasts. First, the prolonged drought in Southwest China and the impact of extreme weather on agricultural production elsewhere will likely drive up food prices, further fueling inflation. Second, the rapid increase in housing prices in March has made stabilizing the property market an urgent priority.
Looking at the economic performance in April and recent real estate trends, macroeconomic regulation has shown some success. Economic growth has returned to levels close to pre-crisis levels, indicating a solid recovery trend. Although the consumer price index rose to 2.8% year-on-year in April, this was based on a low base from the previous year, so the increase remains moderate. Additionally, housing prices have started to ease, and the intensity of real estate controls has exceeded market expectations, leading to a sharp drop in transactions in first-tier cities. I believe prices will also begin to decline soon.
However, macro-control is still far from being complete. April’s data showed that both CPI and PPI exceeded market expectations, confirming that inflationary trends are strengthening. In the coming months, rising raw material prices will eventually be passed on to consumers. Moreover, the advancement of resource price reforms is likely to worsen inflation. Economic restructuring remains a key long-term challenge for China. In the first four months of the year, rapid growth exacerbated structural imbalances, particularly in energy consumption, which has not been effectively reduced. This makes the task of energy conservation and emission reduction in the next three quarters more critical than ever.
To address these issues, the State Council has issued guidelines to accelerate resource tax reform, adjust natural gas prices, implement tiered electricity pricing for households, and introduce policies related to coalbed methane, natural gas power generation, and desulfurization tariffs. These changes will inevitably lead to higher price levels. Balancing inflation control with structural adjustment will become a significant challenge.
Additionally, the ongoing European debt crisis and the weakness of the euro pose a growing risk to Chinese exports. Although the global economy seemed to recover after the financial crisis, the severity of the Greek debt crisis and its impact on the euro have exceeded initial expectations. Given that the EU is China's largest trading partner, tighter fiscal policies, slower growth, and a weaker euro could significantly hurt China’s export sector. This means that China’s macroeconomic policies must remain vigilant about external conditions, especially the economic developments in the Eurozone, and be prepared to respond quickly.
Moving forward, with continued real estate regulation and increased construction activity, housing prices are expected to fall in the coming months. However, if inflation leads the government to suddenly raise interest rates, it could burst the real estate bubble but also trigger a local government debt crisis and slow down fixed asset investment. This “hard landing†scenario would be undesirable. Therefore, the challenge lies in keeping inflation under control, allowing housing prices to gradually decline, maintaining steady export growth, and sustaining strong domestic consumer demand—a balanced outcome that will test the wisdom of macroeconomic policymakers.
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