When it comes to the time points of bottoming, Liu believes that it may lie in H2 2016 or H1 of 2017.

He also pointed out that there are three investment indexes, which are infrastructure, real estate, and export, are crucial for judging whether the present economy is in a short-term recovery or whether it has already hit the bottom, especially the real estate investment index.

According to Liu’s judgment, the real estate investment has already arrived to a historical inflection point, as the demand for residential housing in urban China has reached to its peak, in 2014. That’s about 12 to 13 million flats.

Besides, to judge whether the economy has already hit the bottom from the perspective of supply front, the key is to take the benefits into consideration, one of which is PPI, the other one is the profits of industrial companies, according to Liu Shijin.

In this way, one of the necessary requirements for a successful economic bottoming is to reduce inefficient capacity and put the reform of supply front into effect.

The following is part of Liu’s speech he had in Macroeconomic Situation Analysis Conference of First Quarter of 2016:

 “From the perspective of supply front, in the past 30 years, the Chinese government has mainly focused on high-investment which consist of three parts, among which are 20% to 25% of infrastructure, 25% to 30% of real estate, and 30% of manufacturing industry. These three investments accounted for 85% of the total investments in China. The rest 15% went to agricultural industry and others.”

 “The manufacturing investment directly depends on infrastructure, real estate, and export. In the past long period of time, they have been three major demands for China.”

 “The peak of the infrastructure investment came at around the year of 2000. And in recent years, the infrastructure has always been the tool for government keep stable growth. The falling back of the export is regular, as it has always related to the rise of domestic factor cost and labor cost, and the decline of export-competitiveness.”

 “We took the situation of the real estate as a historical inflection point. And from the perspective of a long-term period, the historical demand peak of real estate equals to a ceiling.”

 “The real estate market has already reached to the ceiling in 2014, and since then the total investment volume of real estate held the line. The real estate investment reduced to about 10%, and it declined to 1% in 2015. Since August 2015, the month-on-month growth turned to be negative. From the perspective of supply front, China’s economy has basically bottomed out. And from the present situation, the growth rate of the investment since the February would be 10.2%.”

“Besides, the supply of the demand side should be adjusted accordingly. However, due to the slow adjustment in the supply, the problems of overcapacity arise in various industries, especially in coal and steel industries, among which the excess ratio were above 30%. The serious problems of excess caused the so-called deflation, the ex-factory price of industrial products were in negative growth for 48 consecutive months. Since February 2016, the price growth rate rose from the former -5.9% to -4.9% for present.”

“The second important relative result is the profitability of the industrial enterprises. Over a one-year period since August 2014, the profitability was in negative growth, among which industries of coal, steel, iron ore, oil, petrochemicals, building materials were facing the most striking excess problems. The negative growth of the industrial profits was mainly caused by those excess production capacities.”

“The benefit is another factor to see whether an economy bottomed out or not. And for the benefit, there are two important indexes. The first one is the picking up of PPI. The best enterprises in the industry began to lose money since the fourth quarter of 2015 and had already reduced to the lowest level for industry’s survival; therefore the period of the lowest commodity price may have gone. And the second one is that the profits of the industrial enterprises should turn from the negative growth to positive growth and keep a stable increase in a long-term run.”

“After six years of fall-after-rise, China’s economy, which is expected to bottom out in the H2 of 2016 or the H1 of 2017, is closing to the bottom at present.”

“As the public especially concerns China’s growth rate of investment, so here I’d like to tell you that our investment growth rate is around 10%. The gap between the growth rate of the investment and the fixed capital formation became greater and greater, and at present the former one is almost as twice as the latter one, that is to say, if the investment growth rate is 10%, the fixed capital formation growth rate would be 5% to 6%.”

“Here we emphasized on the reform of supply front and put the inefficient capacity reduction as the priority since one of the necessary requirements for successful bottoming is to reduce inefficient capacity. The reform of supply front could actually solve the deep-seated problems in China’s economy. Our confidence is improving because we are facing the problems and are ready for reform. In conclusion, we have to take those above factors into consideration to evaluating China’s economy.”

*This article is an edited and translated version by CCM. The original article comes from Jiemian.com.

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