On-the-Ground Data Confirms China’s Economic Rebound Scenario
After severe jitters in 2015 and 2016, the Chinese economy and its foreign exchange rate have been mostly stable in 2017. Except for volatility in interest rates and the stock market, everything seems fine ahead of the important Party Congress to be held this fall. At the congress, the regime will confirm the next Party leadership.
Of course, official figures, like the 6.9 percent annualized GDP growth rate released for the first quarter of 2017, are unreliable and merely a rough indicator of where the journey is going.
To provide a more accurate read on China’s economy, Leland Miller and his team at China Beige Book International (CBB) interview thousands of companies and hundreds of bankers on the ground in China each quarter. They collect data and perform in-depth interviews with Chinese executives.
The CBB’s recent report confirms the eerie stability of the Chinese economy.
“So far, 2017 has played out as a best-case scenario. … The remarkable absence of both domestic and foreign shocks has created the stable environment corporates need to outperform most expectations, including ours,” states a preview to the full Q2 2017 report.
The retail, services, and manufacturing sectors all showed an increase in activity. Hiring was also better than in an already good first quarter. This is important for the Chinese regime, as unemployed workers are unhappy workers who often express their unhappiness in mass protests.
According to the official unemployment rate, this is hardly ever a concern, as it has been hovering between 3.97 percent and 4.3 percent for the last decade. However, when the real economy dipped in 2016, the China Labour Bulletin logged a total of 1,378 strikes and protests in the second half of last year.
Extend and Pretend
However, despite the overall positive response from the firms surveyed by CBB, there are a few traditionally Chinese “extend and pretend” caveats to the rosy picture.
For example, every sector reported record inventories, which is positive for production and jobs, but not for sales. If the stocked products aren’t sold shortly, it will hit the companies’ bottom line.
“The same companies who report solid results on most indicators also continue to show cash ﬂow in the red—corporate health has not yet responded to better growth,” states the CBB preview.
Then there is the credit market, a source of worry for China watchers since the end of last year. China’s bank borrowing rates have been creeping up from 3 percent to almost 4.5 percent since late 2016, and CBB notes that this is now affecting the bank’s corporate customers.
“In Q1 … credit tightening was limited to interbank markets. In Q2, it hit firms: Bond yields and rates at shadow banks touched the highest levels in the history of our survey, and bank rates their highest since 2014,” states the report.
According to CBB, however, overall borrowing was relatively stable, despite higher costs and the fact that corporate bond issuance collapsed in 2017. Why? Because firms believe in the ability of the regime to keep things stable beyond 2017.
As the report puts it, “while borrowing did see a mild drop for the third straight quarter, companies’ six-month revenue expectations remain robust in every sector save property. Companies assume deleveraging is transient, likely because they are skeptical the Party will allow economic pain in 2017.”