The core logic of the market next year: Where does the demand power for China's re-inflation come from?

CITIC Securities believes that the core logic of China's economy and capital markets next year is "re-inflation," but the driving force comes not from internal stimulus, but from the strong counterbalance of exports against the downturn in real estate investment.

In a recent research report, the CITIC Securities Zhang Yiping team stated, as long as exports maintain stable growth, total demand will not contract even if domestic consumption and investment remain low. Combined with the supply-side "anti-involution" reforms, re-inflation is highly likely, and the GDP deflator is expected to turn positive around mid-year.

Re-inflation: The Core Script for Next Year's Market

The report clearly points out that "re-inflation" is key to understanding China's economy and capital markets next year. Since the second quarter of 2023, China's economy has been troubled by weak prices. If this situation can be successfully reversed next year, the current relatively strong performance of the stock market and the relatively weak performance of the bond market will continue.

However, the main concern in the market lies on the demand side. Many opinions suggest that relying solely on supply-side reforms such as "anti-involution" to constrain supply, without corresponding demand-side policies, will make price recovery unsustainable. The report argues that although specific demand policies to complement "anti-involution" may not be introduced, this does not mean that there is no support for the expansion of total demand.

How Exports Fill the Huge Gap in Real Estate

The main drag on current total demand is real estate investment. Unlike social retail, manufacturing investment, and infrastructure investment, which can still maintain positive growth, real estate investment has seen negative growth for three consecutive years, with this year's decline likely to expand to around -15%, significantly contributing negatively to total demand.

However, from the perspective of GDP by expenditure, a key counterbalancing mechanism is at work: the stable growth of exports can completely offset the demand gap caused by real estate investment.

For example, in 2022, the export scale was 25 trillion yuan, an increase of 2.13 trillion yuan compared to 2021. During the same period, the scale of real estate investment, excluding land acquisition costs, was 9.19 trillion yuan, a decrease of 1.22 trillion yuan. The sum of the changes in both amounts resulted in a net increase in demand of 904.446 billion yuan, indicating that export growth effectively offset the decline in real estate. The same situation is expected in 2024, with the sum of the changes expanding to 1.308909 trillion yuan, further enhancing the counterbalancing effect of exports against real estate investment.

Focus on Exports Next Year

CITIC Securities predicts that this year's actual real estate investment scale will decline to around 6 trillion yuan, while the export scale will increase to around 28.59 trillion yuan. This means that the sum of the export increment and the real estate investment gap will still exceed 1 trillion yuan, with the counterbalancing effect continuing.

Next year, even assuming a pessimistic scenario where real estate investment growth further declines to -20%, the export scale under the expenditure method only needs to grow by 3.1% to offset the demand gap it creates.

The likelihood of achieving this growth is high. The report anticipates that in 2026, a "China-U.S. policy resonance" may occur: after the U.S. midterm elections, the Trump administration (hypothetically) may adopt a dual easing policy of fiscal and monetary measures to boost the economy; meanwhile, China will be at the beginning of the "14th Five-Year Plan," with major projects likely to commence. The resonance of the Chinese and U.S. economies will drive the expansion of global trade demand, providing strong support for maintaining positive growth in Chinese exports. **

The conclusion is very clear: as long as there are no issues with exports, even if domestic consumption and other investment areas fluctuate at low levels, China's overall demand level will not shrink. On this basis, combined with policies such as "anti-involution" to constrain the supply side, the possibility of re-inflation in China's economy next year is relatively high. A clear signal will be: around mid-year, the year-on-year growth rate of the GDP deflator will turn from negative to positive.