If You Think the Chinese Economy Is Crashing, The New China Beige Book Report Will Change Your Mind

By Valentin Schmid
Valentin Schmid
Valentin Schmid
Valentin Schmid is the business editor of the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.
June 22, 2015Updated: June 23, 2015

Ever since China missed its first quarter GDP target, the China bears have come out in full force. They said years of overspending and over construction are finally hitting home, and the economy will be in free fall from this point onward.

The situation on the ground, however, is a bit more nuanced than that. Leland Miller of the China Beige Book (CBB) would know. The independent research organization collects data from thousands of Chinese firms every quarter, providing unique insight into the actual status of the economy.

“We are not seeing this precipitous decline where things get worse quarter after quarter; that’s just not the case,” Miller told Epoch Times, after the release of the report for the second quarter of 2015.

By talking to scores of executives and conducting thousands of online surveys, CBB could see an overall improvement in the Chinese economy in the second quarter.

“The critical piece was that firms were selling more. Combined with the fact that deflation seems to have peaked, you didn’t see the same drop in capex and loan demand in a long time,” said Miller, referring to capital expenditures by firms.

Miller believes that these green shots should be reflected in official data in the coming months.

While prices for commodities such as steel are still in decline, prices in the overall economy have stabilized, according to the report. Producer prices, which have declined 11 percent since 2010, have been increasing compared to the first quarter of 2015, according to 47 percent of the respondents.

Only 12 percent reported a decline. This number expresses companies’ confidence in economic development: If they buy more raw materials in anticipation of higher demand for their products, prices should go up.  

“Overall, firms continue to do better than official data might suggest. Cash flow remains stable, volumes are increasing, and margins saw a minor uptick. Capex and borrowing both stabilized this quarter, while the job market continues to show resiliency,” states the report.

A good portion of firms (37 percent) reported an increase in the price of goods sold, while 13 percent reported a decline; 56 percent of manufacturing firms also reported an increase in volumes. Wages rose as 46 percent of companies boosted employee pay and only 9 percent reduced it.  

Another positive sector was retail, where 59 percent of companies reported growth in sales, whereas only 13 percent reported a decline.

Real estate, the long-term worry and a lynchpin of the Chinese economy, also showed some improvement. Almost half of the firms (49 percent) reported revenue gains, but 19 percent still reported declines. CBB’s data confirmed the recently weak price data, however, with only 35 percent of firms reporting an increase.

The CBB also confirmed the recently weak trade figures as only 37 percent of firms reported increases and 17 percent reported a decrease in orders.

“How much is China turning around? How much does the market overestimate the negative and the positive? Profit margins have been maintained. Things weren’t as bad as the market thought, so now you are seeing an uptick,” said Miller.

“This doesn’t mean we are going to see a long-term bounce back. We are not going to see old growth again. That will never happen,” he added.

As for how much the historic stock market rally has to do with the uptick, Miller doesn’t advance a view. “Hearts and minds are being changed because equity values have gone up. We are seeing information on the ground that things are getting better,” he said. According to some economic theories, paper gains on stock trades create a wealth effect, inducing people to buy more, which would explain the improved retail numbers.  

However, according to Miller, the stock market should have the highest impact on capital expenditure, the amount firms invest in new property and equipment, after they raise money through stock sales. But second quarter data for business spending remains weak. Only 45 percent of firms increased capital spending, and 12 percent reduced it.

A chart of the closing prices of the Shanghai Stock Exchange's composite index since 2005. (Fan Yu/Epoch Times)
A chart of the closing prices of the Shanghai Stock Exchange’s composite index since 2005. (Fan Yu/Epoch Times)

“If people see the stock market continue to go up, that will affect hearts and minds too. What we are seeing is a bunch of little things that got better quarter to quarter. We are not seeing a dramatic recovery; we are seeing a broad recovery. The stock market played a role, but it’s impossible to tell the wealth effect,” Miller said.

He also believes that recent central bank stimulus measures had little effect. “People toss around the word QE and there is an attempt by the [regime] to deal with the debt problems. This supported a return of confidence, but it’s not dealing with China’s problem.”

Other notable findings in the recent China Beige Book report:

  • Only 21 percent of firms borrowed money
  • Average interest rates for bank loans was 7.01 percent, nonbank loans 8.17 percent, and bond yields 7.44 percent
  • More than half of bankers said rates fell during the quarter
  • Inventory growth was moderate, with 32 percent of firms reporting increases
  • 37 percent of retailers opened new stores and only 29 percent have plans to open new stores