News Analysis
If the Chinese authorities want a vibrant, healthy economy for the 70th anniversary on Oct. 1 of the People’s Republic of China, they’re not getting it. One of the reasons is that the People’s Bank of China (PBoC) is not dialing up the level of support to the economy it typically has provided in slowdowns, according to China Beige Book (CBB), a research service that speaks to thousands of companies on the ground in China.
Across the board, the third-quarter weakness is unmistakable, with nearly every sector reporting lower growth and earnings, profits, pricing power, and hiring.
“We saw the economy weaken far more substantially late last year than was ever acknowledged in the official data,” said Shehzad Qazi, managing director, CBB International.
The economy rebounded in the first quarter of 2019 after the PBoC returned to its old habits of providing generous credit. But this sugar-high started wearing off into the second quarter, and now the third quarter looks dire.
Manufacturing, which drove the economy through most of 2017–18, is now a drag. CBB reports that nearly every firm surveyed has borrowed in 2019, and either the sector is in distress or a large number of companies should be insolvent.
China’s transition to a service-based economy from a manufacturing one—the sign of a maturing economy—continues to be stalled. The service sector is not showing the capacity to absorb manufacturing sector jobs.
Corporate bond issuance is the highest it’s been since the CBB started tracking it; loan applications are up and rejections are down. Lending by the less regulated shadow banks is at its highest on record over the last two quarters. Firms have no problems borrowing and the cost of capital is falling.
CBB reports credit conditions in real time, whereas official statistics are lagging indicators and are “subject to a political narrative,” says Qazi.
Plunging Yuan
U.S. President Donald Trump has taken China to task for its currency manipulation—allowing it to weaken so as to boost exports. The United States has instituted tariffs on a broader scope of imports in its trade war with China, with the latest round coming in September.
The yuan fell past the symbolic 7 threshold in early August against the U.S. dollar and chaos in financial markets ensued. The depreciation would prove to be quite prescient for the Chinese economy, which is at its nadir in 2019.
Qazi says the depreciation has not helped the economy, as export demand for aluminum and copper both declined significantly in the third quarter.
He adds that this strategy is outdated and that Beijing will eventually want a stronger currency to help the consumer.
“Beijing will be inclined to seek a relatively stronger yuan over time, to improve purchasing power with regard to imports, thus strengthening consumption,” he said. For now, official indicators of consumer and business sentiment remain positive.
Unlike the currency, Chinese stocks are notably higher in 2019, but it appears to be predicated on hope instead of fundamentals.
“Stocks seem out of synch with the performance of Chinese companies,” Qazi said. “The market loves stimulus rumours above all else.”
Another threat to the mainland Chinese economy is the Hong Kong protests, which initially began in opposition to an extradition bill that would have allowed the Chinese regime to transfer individuals to face trial in mainland China. Pro-Beijing firms have been targeted for boycott by pro-democracy protestors.
