China’s Economy: Still Below 50
Any kind of improvement will have to start somewhere. For the Chinese economy, the starting point is the second quarter of 2016, at least according to the data experts at China Beige Book (CBB).
Every quarter they survey thousands of Chinese companies and ask them whether their revenues went up, whether they are hiring or not and what they think of the future.
The results are a much better representation than official data, which often follows CBB’s lead a quarter or two later.
So after a pretty bad first quarter, CBB says most indicators improved in the second quarter, although activity is roughly flat over the year. In most cases, less than 50 percent of survey respondents report an improvement in sales, hiring, capital expenditure, or bank lending.
So the results hardly represent a booming economy, but are much better than the below 40 economy from the first quarter.
“The rebound constitutes a performance roughly echoing that of a year ago—profits and capex were moderately better than the second quarter of 2015, revenue and wage growth were similar, and output, new domestic orders, receivables, and payables all weakened over the past year,” CBB states in an advance release of its report
The problem: The report for the second quarter of 2015 looked similar, only for things to get worse later.
But let’s focus on the improvements first, which in most cases confirm official data throughout the second quarter.
After the central government made it clear it would turn on the spigots of fiscal stimulus and targeted a 3 percent deficit for 2016, it followed through.
According to CBB, one of the prime targets for fiscal spending is the transportation sector, which is largely controlled by the government directly or State Owned Enterprises (SOE).
“Transport construction followed its worst performance ever in Q1 with its largest improvement ever, a reversal which is difficult to explain except by citing (effective) government action,” states the report.
So revenues improved at 59 percent of the transportation construction companies surveyed, which is 43 percentage points higher than in the first quarter.
Transportation revenue in general improved at 57 percent of the firms and most companies (63) forecast higher revenues in the next six months. Also of note, 51 percent of steel companies reported higher revenues, possibly connected to the increase in transportation construction.
Another favorite for government stimulus is real estate, it also improved. Half of the firms reported increases in revenues this quarter, an improvement of 23 percentage points. It’s interesting to note that the best performers came from the less loved Tier 3 cities.
This fits the narrative of the official data which reported vast price increases and volume increases. Residential real estate construction lagged at 43 percent, hardly surprising with 18 million of unsold units still on the market.
The service sector also showed some real gains, a feat many have been waiting for in the China rebalancing story. Revenues for service sector firms increased in 57 percent of the cases, a boost which is likely disconnected from government stimulus and fits the rebalancing story from manufacturing to services.
“This is a difficult performance to replicate, but it’s exactly what services must do in order for overall growth to be maintained as excess manufacturing capacity is addressed, states the report.”
Media, restaurants, healthcare, and IT all did well.
The Below 50 Economy
The rest of the economy is the below 50 economy. Better than last quarter, but less than half of firms are making serious headways. Capital expenditure, manufacturing, retail, commodities, and residential real estate construction all fall into that category, broadly echoing official data.
CBB notes that private investment has not decoupled from public sector investment and should see a rebound soon. Most official data shows a big drop in private investment whereas state investment is rising.
“New data from our 3,000-firm survey is still more optimistic, showing Q2 capex recovering sharply from first-quarter weakness,” states the report. “Private firms led the way in Q2.”
Despite the overall positive report, some dark spots still remain. Only 37 percent of companies are hiring more people, especially private firms. The labor market remains right, especially unskilled labor supply only improved at 29 percent of companies, confirming official data that migrant workers are not leaving the countryside anymore.
Coal companies did particularly bad in the commodities sector, with only 33 percent of companies showing an improvement. Exports for the whole of the manufacturing sector improved at only 34 percent of companies.
Bank lending to companies is also not happening, despite China’s record credit binge in the first quarter. Borrowing increased at only 17 percent of the companies, as application for loans increased at 37 percent and availability of loans increased at 33 percent. Almost a fifth of all loan applications are rejected, according to the bankers responding to the survey.
Because firms are not demanding new loans, interest rates also dropped across the board (bank, bonds, and shadow loans) and remain near record lows, one reason why the yuan was under constant pressure in Q2.