China Data Expert: ‘Monetary Stimulus No Longer Works’

December 20, 2015 Updated: December 22, 2015

This year, the Chinese economy hit a rough patch. Whether it is official data, bank research data, foreign exchange markets, or commodity prices, they all paint the same picture.

Many economists predicted this slowdown, but there was one researcher who knew it first. Leland Miller of the China Beige Book operates the most comprehensive system of real-time business surveys in China and claims to have the most reliable and timely data.

Each quarter, his researchers contact thousands of businesses across the country and interview high-level executives to find out what the economy looks like from the ground.

Modeled after the Federal Reserve Beige Book, Miller and his team replicated this approach in China—with stunning results. 

Epoch Times spoke to Mr. Miller after CBB published a particularly worrisome report for the fourth quarter

They are realizing there is going to be pain.

Epoch Times: Your fourth quarter, on the ground report on the Chinese economy was pretty bad. Why did this surprise you?

Leland Miller: It has been a long term slowdown. It was something that read out very clearly in the data across quarters and years.

But before this quarter, over the summer, the markets went from optimistic to becoming bearish in a short time. It was the mismanagement of the stock market and people were wondering whether this meant the incompetence in running the stock market would spill over: If these are the same people running the economy, why won’t we see similar problems elsewhere?

The second thing was the currency devaluation, which was justified considering what was going on with other currencies. But it wasn’t communicated very well and investors were left wondering whether this was part of a bigger thing—maybe the start of currency wars, or clandestine stimulus policy through other means. Investors didn’t understand what was happening.

The third strike was the weak manufacturing data—low manufacturing indicators, very low official data for manufacturing. China Beige Book manufacturing data was very weak as well.

Chinese workers prepare stuffed toys at a factory on September 17, 2015 in Zhejiang, China. (Kevin Frayer/Getty Images)
Chinese workers prepare stuffed toys at a factory on September 17, 2015 in Zhejiang, China. The China Beige Book surveys thousands of small and large businesses in China.  (Kevin Frayer/Getty Images)

The combination of these three things got people nervous and caused a market sell off based on the mistaken notion that China had become fragile over night and was about to blow up.

So we have been saying, there are problems, let’s track them, but the system is not crashing now. 

In the third quarter, we had the modest slow down continue, but it was not a crisis and the data looked similar to the type we had been seeing for two years. No question there was a slowdown, but the third quarter wasn’t markedly different from what we had been seeing before.

The new data shows significant deterioration that wasn’t there over the summer when everybody got scared. We saw significant weakness in revenues and profits, which had been relatively strong for the last couple of years despite the economy’s deceleration. What made this drop in profits more concerning was that the two hidden sources of strength looked shaky in Q4 as well.

Epoch Times: You are talking about the price level and the labor market?

Mr. Miller: The inflation picture—it looks like for the first time it could have been harmful deflation. We have not been tracking deflation broadly, but this time it starts to look like disinflation has become deflation for some firms.

If you don’t have firms interested in borrowing and spending, you will have a hard time enacting a stimulus program.

And the labor market, we have been talking about the surprising stability of the labor market despite the economy slowing down. Analysts mistakenly assume the economy is slowing down, so the labor market has been weakening. That wasn’t the case. But in Q4, it’s worrisome, a lot of metrics went down, from job growth to labor supply. Wage growth also slowed.

Now, this is one quarter, it’s not yet a trend. But the data are interesting and different enough to raise at least a yellow flag right now.

We thought the slowdown would change China dramatically over time, but it’s one that investors and the regime can manage. But the type of slowdown we saw this quarter—if it continues in the future—then this will be something very different and much more difficult to manage.

Epoch Times: What about China’s currency policy, monetary policy, fiscal policy?

Mr. Miller: We think the Chinese are not very likely to devalue the currency dramatically. Especially with the strong dollar, there will be some depreciation against the dollar. We think there is going to be depreciation, but they are not trying to do a one-off devaluation

For a long time, the people assumed the Chinese have monetary stimulus on the one hand and fiscal stimulus on the other hand. Rates have been falling for a number of quarters and yet the share of firms borrowing has been dropping despite that. Capital expenditure was falling.

You have to understand that the promises of 7 percent growth forever are part of a political narrative that don’t reflect reality.

If you don’t have firms interested in borrowing and spending, you will have a hard time enacting a stimulus program.

All the talk is about fiscal policy. But if you look at some of the sectors that are most relevant to the government trying to boost up stimulus, it’s transport and transport construction. Both of those sectors have had a dismal fourth quarter.

If this fiscal stimulus is happening, why aren’t those sectors improving. If you have the ammunition, were is the evidence it is actually working? We have shown for years monetary stimulus no longer works.

If this becomes a new normal, if the labor market is weakening, if sectors keep showing those downticks, will the Chinese decide to double down on stimulus even though they know it has limited use.

Epoch Times: Is the regime panicking?

Mr. Miller: I don’t think they are panicking. Trying to stage manage a slow down for years, the dynamics are changing and certain things scare them a bit, like what happened over the summer. They are trying to do it as painlessly as possible but they are realizing there is going to be pain.

You have to understand that the promises of 7 percent growth forever are part of a political narrative that don’t reflect reality.

But we don’t see a hard landing as our base case scenario. If you listen to the Chinese official narrative, it’s just a little hiccup. If investors listen to that they are going to be blown off their feet. This is what happens to commodity producers. It’s dangerous for firms, countries, and individuals not to understand. It’s a permanent slow down and people need to be adjusting to that reality.

Epoch Times: Many people talk about services taking over from manufacturing and exports. True?

Mr. Miller: Services showed quite a bit of strength and people took that and decided to run with it. It sounds great on paper, but Q4 did not show that happening, there was weakness in services and manufacturing. Over time you may have this transition but the data is not bearing that out right now.

People are trading the belief of ignoring manufacturing weakness and expect services strength. China will report manufacturing weakness and won’t get the services’ strength. When they don’t see services’ strength, that will cause more concerns.

There would be more and more of a recovery narrative built in and that’s exactly what’s happening. Don’t overbuy the recovery narrative.

Epoch Times: Are there some positives?

Mr. Miller: Despite the weakness in Q4, retail didn’t do too poorly. Retail didn’t have a bad quarter, but it didn’t have a great quarter. It held up relatively well. Does it look like it will be savior of the economy like many people are hoping? The data doesn’t show that. Neither the savior, nor the goat.

About the China Beige Book: The China Beige Book™ uses quantitative and qualitative data to track on-the-ground sentiment as it changes from quarter to quarter across China’s industries, key sub-sectors, and regions. The quarterly report regularly surveys over 2,100 firms and 160 bankers across China, in addition to conducting in-depth interviews with C-suite executives throughout the country.