Newsletter commentary Sep 2021

In September, the market surged and plummeted, resulting in a slight difference between the beginning indices and the ending ones. The substantial increase of upstream raw material prices was not passed along to the downstream product prices, forming a sharp contrast.

A supply chain problem is there. The overdemand issue is more structural. Some macro variables, hard to be different in normal years, have rapidly changed under the shocks from outside brought about by the pandemic. Service consumption has decreased while goods consumption increased under the covid situation that has lasted longer than expected. Although the GDP would remain unchanged, more goods consumption causes more use of energy-intensive raw materials. This has changed the amount and intensity of energy consumption during a short period of time. The large-scaled QE in the US and EU countries have exacerbated the demand distortion. China’s success on the pandemic control has transformed to an advantage along supply chain that quickly boosted the country’s share in the international trade. Consequently, China has borne such distortion and has seen a deviation of energy consumption in amount and in intensity from planed since last year. In fact, during the first four years of the 13th Five-Year Plan period, China’s total energy consumption and intensity control were quite good. However, it has been very difficult to keep this control in the past two years. In addition, the acceleration of electrification and automation due to the pandemic has increased the energy consumption.

The problems of the economy have been concealed by the increase of energy consumption that usually occurs during the economic boom. The growth and sources of households’ income have been suppressed by the long-lasting epidemic, causing sluggish consumption. The huge increase in export only brought limited profit growth due to high costs. The infrastructure construction didn’t lift much the economy last year. The expectation in property sector has finally been shifted to be in line with the “house for living, not for speculating” policy. The investment in manufacturing has slightly recovered but need further observation on the sustainability with the impact from export.

If we anticipate that the contradiction between supply and demand caused by the pandemic to be gradually and eventually eased, we can expect an improvement on the energy consumption problem. However, with the increase in the proportion of unstable new energy, combined with the insufficient investment in the traditional energy on the upstream, we need to be prepared for higher energy prices and less stable energy supplies. We also need to realize that interferences would be caused by unexpected events such as heavy rain, heavy wind, or sudden change in the number of rainy days. 

With the surge of inflation, the US is going to gradually withdraw from debt purchase and cease providing financial aids to the residents. The flexibility of the supply chain is going to be restored with the popularization of vaccines, hence an ease of the contradiction between supply and demand.  

Under the increasingly stronger constraints on carbon reduction in the future, more projects need to be launched for the economic development and energy security, but companies with growth potential are few. The society will get used to more expensive energy prices and will create new absorption mechanism for new energy. New energy vehicles are replacing gasoline cars with a faster speed but will face reduced subsidies and increased raw material prices next year. Consumer companies will become more attractive after the stock price correction. Platform companies will have opportunities of re-balance and innovation, having gone through strong supervision and interconnection requirement. After the ease of the contradiction between supply and demand on a global scale, the profit distribution will be adjusted among up-, mid- and down-stream. The conditions are more mature than before for the professional, the special, the proficient and the new to emerge.

Another thing to be noticed is that the market turnover was continuously above one trillion RMB in September. This was probably because of the expansion of quantitative funds, but more likely an indication on the macro level that people were increasing their financial asset allocation. The uncertainty lies in property sector and the balance of energy consumption. The strong constraint on the energy consumption may bring challenges to the traditional fiscal and financial counter-cyclical measures’ ability.