As the third quarter draws to a close, and data begins to finalize, the overall economic landscape becomes increasingly evidentEarlier in the year, projections indicated a pattern for 2024: a strong start followed by a dip in the first half, with a recovery anticipated in the latter halfIt's clear that the third quarter will reflect this dip, with benchmarks predicting a growth rate of approximately 4.6%. However, whether the fourth quarter can bounce back remains arguable, as the entire pressure to achieve the annual growth target of 5% now falls upon those final three months.

Achieving this target is no simple featLet's break down the contributions to economic growth in the first half of this year: out of the 5% growth, consumption was responsible for 3 percentage points, investment contributed 1.3 points, while exports added 0.7 points

This suggests that the primary engine of economic growth has been driven by domestic demand, at least on the surfaceIt is critical to note that the 0.7 points attributed to exports represent only direct contributions; a broader analysis indicates that when factoring in the manufacturing investments stimulated by exports, the total contribution may exceed 60%. Although I suspect this figure is somewhat inflated, it does imply that exports significantly impact overall growth.

One notable trend over the past two years, however, has been the weakening of the link between export earnings and domestic demandNormally, foreign trade entities convert earnings into Chinese renminbi, subsequently fueling local consumption and investment—whether through spending on leisure, buying homes, cars, or investing in stocks and bondsYet, recently, despite a surplus amounting to hundreds of billions annually, the conversion of foreign currency has been minimal, causing reserves to stagnate

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This consolidation of currency, surviving per se, turns foreign exchange into mere assets within the national context, failing to generate tangible consumer or investment activityThus, the critical indirect effect of exports on stimulating the economy seems to be waningThe challenges prompted by this disconnect result in persistent internal deflation and external inflation, complicating recovery efforts.

Looking back at the economic trends over the first three quarters, one can identify key patterns:

1. The first quarter saw a surge attributed to the deployment of policy resources from the previous fourth quarter, indicating a strong startYet, this momentum quickly diminished in the second quarter, with GDP growth plummeting from 5.3% in the first quarter to 4.7% in the second.

2. During the second quarter, there was supportive policy momentum—further reductions in interest rates and stimulating efforts in the real estate sector

However, the third quarter marked a policy hiatus leading to an accelerated downturn in economic performance; manufacturing PMI dipped below the neutral point for the first time in six monthsThis suggests the third quarter may register the lowest annual GDP growth.

3. As economic indicators faltered in the third quarter, the stock market experienced significant volatilityA new policy emerged towards the end of the quarter, propelling indices upward from below 2700 to nearly 3700, resulting in an extraordinary bounce of around 1000 pointsNonetheless, the volatility prompted policymakers to reinforce stability measures; the initial bullish momentum faced setbacks, leading to a new phase of policy implementation involving increased liquidity and expedited fiscal investments.

4. If GDP growth in the third quarter hovers around 4.7%, achieving a growth target of 5.3% in the fourth is paramount

While it won’t be effortless, the resources available are substantialThe authorities have emphasized fully utilizing existing policies, leveraging the 2.3 trillion yuan in issued but unutilized special bonds, which can facilitate real estate purchasesMoreover, the potential use of over a trillion new special government bonds for banking and credit enhancement is noteworthy.

In this context, it's vital to consider how the Chinese economy will navigate the fourth quarterA fundamental skill in macroeconomic analysis is simplifying complexities down to pivotal contradictionsPresently, the country's core economic problem remains inadequate demand, which has incited various issues like oversupply and debt constriction—these are reflections of insufficient internal demandHowever, external demand exhibits relative resilience amid global inflation.

Concisely, the primary driver behind insufficient domestic demand is the ongoing adjustment in the real estate market

This sector’s turbulence significantly undermines investment and durable goods demand, both of which overwhelmingly influence economic vitality.

It follows that until the real estate sector stabilizes, the momentum for demand contraction remains pronounced. The ripple effects of the real estate adjustment shape the structural changes in local demand, financing, wealth accumulation, and overall market sentimentCompounding this issue, local infrastructure projects, closely tied to real estate, are also seeing similar contraction trends, pulling down GDP growth by over 1 percentage point.

Should export performance continue to falter, this will leave a significant gap of approximately 1.4 trillion yuan unfilledThus, dependence solely on domestic demand becomes paramount

To revive this internal cycle, fiscal policy must serve as the motivator for renewed investment demandGiven the fiscal multiplier observed to be around 0.8, a supplementary investment of at least 1.75 trillion yuan becomes essential, contingent on the effective deployment of existing special bond funds.

Consequently, combining existing policy resources with additional fiscal measures, achieving a financial expenditure of approximately 4 trillion yuan in the fourth quarter is criticalFollowing the subprime mortgage crisis of 2008, a 4 trillion yuan stimulus was rolled out to bridge demand gapsHowever, we now find the M2 supply seven times greater than pre-crisis levels, accompanied by significant escalation in overall debtHence, producing similar effects requires immense policy potency.

At this pivotal fourth quarter, in light of weak external conditions, achieving the annual economic targets will necessitate an additional allocation of about 1.5 trillion yuan in fiscal policies to reignite domestic dynamics