June 27, 2017

A customer selects vegetables at a supermarket in Hangzhou, in eastern China's Zhejiang province on March 10, 2016. (STR/AFP/Getty Images)A customer selects vegetables at a supermarket in Hangzhou, in eastern China's Zhejiang province on March 10, 2016. (STR/AFP/Getty Images)

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.”

Read the full article here
March 28, 2017

Workers at a construction site of a residential skyscraper in Shanghai on Nov. 29, 2016. (JOHANNES EISELE/AFP/Getty Images)Workers at a construction site of a residential skyscraper in Shanghai on Nov. 29, 2016. (JOHANNES EISELE/AFP/Getty Images)

Given the notorious unreliability of official Chinese economic data, analysts risk getting it wrong when relying solely on figures the government puts out. Is the China growth story, and a rebalance from manufacturing to consumption, actually happening? Or is the question of enormous debt, with semi-bankrupt state-owned enterprises and widespread overcapacity, still the overriding concern?

To shed light on these murky issues, Leland Miller and his team at the China Beige Book (CBB) interview thousands of companies and hundreds of bankers on the ground in China each quarter to get an accurate gauge of how the economy is doing.

CBB collects quantitative data and conducts in-depth interviews with local executives. It often comes up with data that are completely opposite to the official narrative—but not always, as its survey for the first quarter of 2017 shows.

“China Beige Book’s new first quarter results show an economy certainly stronger than a year ago and performing comparably to last quarter. But core problems remain, and some of them are getting worse,” the CBB Early Look Brief states.

First, the good news. In order to maintain social stability, the Chinese Communist Party needs to maintain high employment at all costs. And it did in the first quarter.

“Nationally, jobs and wage growth were unchanged from last quarter, but the party may not be resting easy about the desired stability,” the brief states.

What’s keeping central planners up at night is the fact that only State Owned Enterprises (SOE) are hiring, at the directive of the government, while private enterprises have slashed hiring, according to CBB.

“Job growth slowed at private firms, leaving state enterprises to drive employment. Moreover, workforce expansion was concentrated in old economy sectors.”

No Rebalancing

This is another problem, given how Chinese officials have hyped up the term “rebalancing” over the last decade. The term covers a range of policies intended to shift economic focus from heavy industry and exports into consumption and services.

“It’s about cutting power, it’s a self-imposed revolution,” said Premier Li Keqiang in his first speech after being appointed in 2013.  “It will be very painful and even feel like cutting one’s wrist.”

A picture shows the headquarters of the People's Bank of China (PBC or PBOC), the Chinese central bank, in Beijing on August 7, 2011. Standard & Poor's US debt downgrade was a wake-up call for the world, a commentary in a top Chinese state newspaper said on August 7, adding that Asian exporters faced special risks. China is the largest foreign holder of US Treasuries. AFP PHOTO / MARK RALSTON (Photo credit should read MARK RALSTON/AFP/Getty Images)

The headquarters of the People’s Bank of China, the Chinese central bank, in Beijing in this file photo. (Mark Ralston/AFP/Getty Images)

Over the last couple of years of CBB coverage, this rebalancing has failed to materialize on the ground, although officials keep talking about it.

The latest quarter was no exception. One important proxy for the ascent of the Chinese consumer, for instance, is retail sales.

In 2017, even official retail sales growth dipped below 10 percent for the first time in years. Although this is a number that developed markets could only dream about, it has been trending down, not up, as it should under a rebalancing scenario.

And CBB data suggests the retail sector may in effect be even weaker. As the brief says: “Our more extensive results show much more than easing sales. Profits, investment, cash flow, and hiring all weakened as compared to [the last quarter of 2016]. Price and wage growth were also slower. Retailers borrowed less despite sharply lower rates, indicating lack of confidence.”

Another indicator is the services industry. China wants to move away from making widgets and melting steel to provide high-level domestic services like finance and software-based solutions. This approach would be better for the industrially-poisoned Chinese environment too.

Such hopes remain “premature,” states CBB. Manufacturing did better than services in all respects, from sales to profits, as well as investment and borrowing.

No Cuts

Another major element of rebalancing is the cutting of excess industrial capacity, especially in coal and steel. These would all be market-based reforms, where semi-bankrupt companies stop producing, wasting resources, and depressing prices.

Officially, China said it met its 2015 target of cutting 45 million metric tons of iron and steel capacity as well as 250 million metric tons of coal capacity.

Not so according to the CBB report. “China Beige Book data show net capacity has risen in every sub-sector for each of the last four quarters.” This means that China did shut down some plants, but that more new ones were built at the same time.

According to research firm Capital Economics, the accounting doesn’t add up. “If companies are actually reducing their production capacity, then one should expect that a portion of their workforce is no longer needed and will be laid off,” they write in a recent report. However, total employment in what it labels “overcapacity sectors” has only fallen by 5 percent, significantly less than would support the official numbers.

The CBB data on the ground also contradicts the official monetary tightening narrative. The People’s Bank of China (PBOC) has raised different interest rates it charges banks slightly this year, leading to a spike in interbank lending rates. China watchers subsequently concluded liquidity was tighter everywhere. 

According to the CBB, however, the tightening has only fed through to the property sector, which it believes may have peaked. For everybody else, borrowing conditions remain flush: “It hasn’t happened yet, not on the street. The price of capital fell across the board this quarter, at banks, at shadow financials, and in the bond market.”

Read the full article here

Workers sort parts at an electronics company in Tengzhou, in China’s eastern Shandong province on Feb 1, 2016.  While revenues and profits have grown, companies are squeezed for cash. (STR/AFP/Getty Images)Workers sort parts at an electronics company in Tengzhou, in China’s eastern Shandong province on Feb 1, 2016.  While revenues and profits have grown, companies are squeezed for cash. (STR/AFP/Getty Images)

Chinese regime leader Xi Jinping is rocking so many boats on the political front that he wants to make sure the economy and financial markets remain stable in 2017. He even said he prefers stability over meeting the regime’s GDP growth target. 

The past year was a partial victory, as the regime managed to contain massive capital outflows, labor market stress, and stock market crashes by using the usual tactic of pushing hundreds of billions of dollars into the economy through the state banking system. But underneath the surface, risk in financial markets keeps building. 

Xi recently admitted at a secret meeting that China may not meet its target for GDP growth if doing so creates too much risk, according to a Bloomberg report. As long as the economy and employment remain stable, growth can slip below the 6.5 percent target.

“Investors may obsess over GDP, but the Party can demand any GDP figures it wants. What matters to Beijing is joblessness. If net hiring looks good, the government has little reason to act, even if other indicators show results which disturb markets,” states a report by research firm China Beige Book (CBB).

CBB has made a name for itself by providing accurate on-the-ground data for China’s economy, as official figures are often unreliable. The researchers interview thousands of companies and hundreds of bankers in China each quarter to get an accurate gauge of the themes in the Chinese economy.

The latest report reflects the narrative of the Chinese regime as well as Western analysts: The economy has stabilized thanks to stimulus, and the labor market is also stable.

Revenues in retail, the service sector, manufacturing, transportation, real estate, and the commodity sector increased at more than 50 percent of the companies surveyed in the fourth quarter of 2016, a good indicator of solid GDP growth. Overall profits increased as witnessed by 47 percent of companies and 43 percent of firms hiring more workers. 

Keeping workers happy is the most important objective for policymakers, as an article by regime mouthpiece Xinhua in August stated: “China did not fabricate its unemployment data, and it can keep it stable despite redundancy pressures … Unemployment reflects the performance of an economy and influences policy.”

However, stability in China is a double-edged sword for Western investors. If things are good, more stimulus is probably not forthcoming. “If net hiring looks good, the government has little reason to act, even if other indicators show results which disturb markets. In the fourth quarter, net hiring looked very good, leaving no reason for stimulus in early 2017,” states the CBB report. 

Financial Pressure

This gain in growth and hiring came at a price, however. Profits and revenues at firms are rising, but the cash doesn’t show up at the firms—a potential signal of financial stress. “Cash flow pain persisted, with the year-on-year results rather eye-catching,” states the report.

Much of the cash flow from a company’s operations is determined not only by how much the company sells but also, much more importantly, by how much of that money it receives and when. If a company is still waiting for payment, the money is booked under a category called “receivables.” This category got bigger in 22 percent of the companies CBB surveyed and decreased in only 15 percent of the firms in the survey.

Likewise, if some businesses have to wait for money, they are going to delay payments to their suppliers (“payables”). The payable category got bigger in 26 percent of companies and decreased in only 17 percent—some of the worst readings in CBB’s history.

A survey by Bloomberg earlier this year showed that it takes 83 days for the average Chinese firm to get paid, almost double the time it takes in other emerging markets. As for paying out, Chinese companies are even slower. Euler Hermes, a company that specializes in trade credit insurance, shows that Chinese companies took 88 days on average to pay their obligations in 2015. 

Another drain on cash is a rise in inventory. The companies spend money to produce goods but don’t sell them for the time being. Inventories got bigger at 39 percent of the firms in the fourth quarter, the largest increase on record for the CBB survey. 

The long delays in settling bills could be a sign that payments for interest and debt—another negative for cash flow—are overwhelming companies. If these payments become too large, the companies have to squeeze operational cash flow to keep on going or borrow even more to make their immediate payments.  

“Cash flow could explain why firm borrowing in the third and fourth quarters hit the highest levels CBB has reported since mid-2013. Firms may not be borrowing to fund expansion, but rather to cover shortfalls,” states the report. 

 If firms can’t borrow more or squeeze their suppliers, they will go bankrupt. According to research by Goldman Sachs surveying companies in China, four have defaulted on $3 billion worth of bonds since the middle of November. These defaults are a break with the record in the previous five months from June to October, when only three of the companies surveyed didn’t meet their payments. Given that China’s companies are drowning in debt, this squeeze on cash flow does not bode well for stability in 2017.

Read the full article here

Chinese workers prepare stuffed toys at a factory in  Zhejiang, China, September 17, 2015  (Kevin Frayer/Getty Images)Chinese workers prepare stuffed toys at a factory in  Zhejiang, China, September 17, 2015  (Kevin Frayer/Getty Images)


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.  

Transport construction followed its worst performance ever in Q1 with its largest improvement ever.

—  China Beige Book

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.

Fiscal Stimulus

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.

New data from our 3,000-firm survey is still more optimistic, showing Q2 capex recovering sharply from first-quarter weakness.

—  China Beige Book

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.

(Capital Economics)

(Capital Economics)

Services Up

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.

(Capital Economics)

(Capital Economics)

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 application is rejected, according to the bankers responding to the survey.

Almost a fifth of all loan application is 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.

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Every economy has themes. For the Chinese economy, the only theme up until recently was rapid growth. First because of exports, then because of investment in infrastructure and factories.
The Chinese economy of 2016 has many different themes. One theme is an unprecedented economic slowdown, reflected in official numbers and much worse in unofficial estimates. But then there is the theme of rebalancing. The old economy of manufacturing, investment, and exports is slowing down but the new consumer and services led economy is supposed to take over the baton.
With official sector data notoriously unreliable, China analysts get conflicting messages and don’t know which theme is actually happening. To shed light on this murky situation, Leland Miller and his team at the China Beige Book (CBB) interview thousands of companies and hundreds of bankers in China each quarter to get an accurate gauge of the themes prevailing in the Chinese economy.
Led by rising layoffs at private firms, first quarter job growth took another notable hit.— China Beige Book

CBB collects data from thousands of Chinese firms every quarter including some in-depth interviews with local executives. Although the CBB does not give definitive growth numbers, it logs how many companies increased their revenues or how many laid off workers, for example.
Labor Weakness
The most interesting finding of this quarter’s report is that the labor market is finally reflecting the weakness in the general economy. This hasn’t been the case throughout the slow-down, which started in the second quarter of 2014 according to the CBB data.
“Led by rising layoffs at private firms, first quarter job growth took another notable hit, sliding to a new four-year low. Expectations of future hiring have also taken a dive,” states the report. Only 23 percent of respondents said they were hiring, with 15 percent of companies said they are firing. China has announced it will lay off millions in the moribund steel and coal sectors of State Owned Enterprises (SOE). However, the CBB survey indicates it was mostly private companies which didn’t want to hire more workers.
Only 28 percent of the companies said they will hire in the near future. Another interesting development is the slowing growth in the country’s supply of skilled and unskilled labor. The constant flow of rural workers to the cities dramatically increased productivity over the last 20 years and provided China with a low-cost labor advantage. However, many analysts now estimate that the Lewis Turning Point has been reached and China’s working age population is declining. The CBB report confirms this thesis, as only 33 percent and 24 percent of the companies reported growth in skilled and unskilled labor.
The good news: Profit growth stabilized overall and didn’t further deteriorate compared to last quarter, although the report notes this may be due to cost cutting and layoffs.
Old Economy
Capital expenditure increased at only 33 percent of companies, a record low in the 5-year history of the CBB. Again it was private companies leading the way here, whereas SOEs tried to budge the trend. Another part of the old economy—manufacturing—continues to deteriorate, especially when compared to the first quarter of last year. Only 42 percent of companies reported revenue gains, which technically means the sector is in recession. 
Collectively, our data show that that firms first stopped borrowing, then cut spending, and now are becoming allergic to hiring. — China Beige Book

Most notable here is the textile sector, which has lost competitiveness due to higher wages. As a consequence, multinational companies relocate their production elsewhere in Asia or even back to the United States. The number of companies reporting gains crashed by 31 percentage points to only 24 percent compared to last year.
The last part of the old economy, the manufacturing export sector, is also very weak, with only 27 percent of companies reporting revenue gains.
The CBB cautions that any kind of monetary easing, like the Reserve Requirement Ratio cut earlier this year, is not having its intended effect. Only 16 percent of companies say they are borrowing money. Again, contrary to the People’s Bank of China’s (PBOC) easing effort, interest rates at banks and shadow lenders increased, presenting an interesting paradox. The central bank eases credit conditions, firms do not wish to borrow, and yet interest rates are on the rise. Unfortunately, the CBB doesn’t explain this phenomenon but succinctly summarizes the current state of affairs like this: 
“Collectively, our data show that that firms first stopped borrowing, then cut spending, and now are becoming allergic to hiring.”
The PBOC has been cutting reserve requirements but the CBB days it didn’t help much (Natixis)
So what about the new economy? Services, consumption, retail?
“Revenue growth in retail and services each slowed again in the first quarter, a rebuke to those analysts who optimistically repeat the mantra of ‘two-tiered economy’ in lieu of compiling relevant data.” So no, at least for now, even though e-commerce companies reported gains.
The worst performers in retail were textile and furniture and appliances. The China watchers who speculated the home furnishing section would take a hit because of a slowdown in property were right. 
Services presented a mixed picture, with 47 percent of firms saying their revenues increased, which is down from 48 percent compared to a year ago and not enough to take over from the old economy.
Within the service sector, China shows a remarkable similarity to the United States: The strongest subsector was healthcare.
As for the property market, residential is still under pressure but commercial property showed a rebound compared to the last quarter.
“Talk of a property rebound was also accurate only on the surface, in light of sharp differences by city size, region, and commercial (soaring) or residential (plunging) orientation,” the report states.
With respect to the official data rebound in prices and record volumes of used homes transacted in residential real-estate, the CBB survey poses more questions than it answers. Or maybe we should just trust the data on the ground and not the officially reported ones, as Andrew Kollier of Orient Capital pointed out: “I don’t trust the official figures of a rebound because

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The official data doesn’t look that bad—this is normal in China. Bad loans are only about 1.6 percent in total, compared to 1.18 percent in the United States. But then, the questions start: What is the real number?
The answer can only be higher, a lot higher. Investment bank CLSA estimates it could be as high as 8.1 percent for all bank loans. Compare this to bad loans in the United States of about 3 percent at the height of the financial crisis.
(St. Louis Fed)
Chinese banks carry assets of $30 trillion of which up to $21 trillion could be loans. In other words, banks could be sitting on as much as $1.7 trillion of bad debt.
Of course, it wouldn’t be China if the state did not invent different ways to conceal the real figure, come up with a doctored one of 1.5 percent and pretends nothing bad is happening. It would not be China if the whole process would not look like a Ponzi scheme. And it wouldn’t be China if Alibaba’s trading platform Taobao would not be involved.
China has experience in managing a banking crisis. It restructured as much as 50 percent of loans and offloaded them onto state-funded “Asset Management Companies” (AMC) at the turn of millennium.
“They rolled over the bad bank debts from 15 years ago, they are still there, believe it or not. When you keep rolling you get to the stage where they are now a much smaller portion of the economy. So in that sense they have succeeded, they have grown their way out of the problem,” says Fraser Howie, author of “Red Capitalism,” one of the first publications to spell out China’s debt problem in 2011.
(Royal Bank of Scotland)
China is doing the same thing again in 2015, so far avoiding a restructuring of the state-owned banks and keeping the official bad loan ratio low.
But this time the AMCs can’t just hold onto the bad debt and wait until it disappears in the ocean of a larger economy, because debt is growing faster than GDP. So they have to sell it on Taobao.
According to local media, China Huarong Asset Management Co., Ltd. plans to list 51.5 billion yuan ($8 billion) worth of bad loans on Taobao.
“AMCs in general will more frequently resort to a ‘wholesaling model’ for distressed asset disposal (i.e. a quick sale of acquired non-performing loans to other parties, thereby earning slimmer margins as opposed to gains on asset value appreciation), given the increasing non-performing loan supply in the current credit cycle,” writes Barclays in a note.
China Cinda Asset Management Co. Ltd sold as much as 4 billion yuan ($620 million) of bad loans on Taobao since May this year.
Normally the AMCs would just wait and see whether the underlying assets would return to profitability and directly sell those assets. This only works in a growing economy, however.
“Rates have been falling for a number of quarters and yet the share of firms borrowing has been dropping despite that. Capital expenditure is falling,” says Leland Miller, president of research firm China Beige Book.
The fact AMCs have to auction off bad loans wholesale means there are just too many of them around and they don’t see much hope for economic improvement.
Barclays also has interesting estimates regarding the credit quality of the loans AMCs buy from the estimated pool of $1.7 trillion of bad debt. It believes AMCs buy the assets for a maximum of 30 percent of book value.
Under these assumptions this would leave banks with a total loss of $1.2 trillion. But in China, when everything is said and done, this number could be far higher.

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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. 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

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Last time around in the third quarter, the China Beige Book’s survey of thousands of companies provided a glimmer of hope for the Chinese economy. It painted a picture of stability, rather than collapse.
In the fourth quarter of 2015, this is no longer the case.
The results “tell a story of pervasive weakness, national sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure all weaker on-quarter,” the report states.
China Beige Book (CBB) collects data from thousands of Chinese firms every quarter including some in-depth interviews with local executives. Although the CBB does not give definitive growth numbers, it logs how many companies increased their revenues or for how many sales declined. 
Example: The number of companies reporting an increase in profits was the lowest since records began at only 37 percent; 22 percent of companies reported a fall in profits. Even the services sector, a bright spot during last year’s quarter took a hit.
Some policy choices simply will not work … It’s past time the ‘stimulus mafia’ rethinks its Pavlovian responses. Reform or bust.— China Beige Book

“Both manufacturing and services performed poorly, with revenues, employment, capex, and profits weakening in each. The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit,” the report states.
So even if the companies don’t say how much profits increased or decreased, the CBB sample provides an accurate snapshot of where firms are headed on aggregate.
“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,” says Leland Miller, president of CBB.
The price level also changed for the worse. Whereas growth slowed down throughout the year, prices were flat to stable. Not this quarter. “Gains in input prices, sales prices, and wages all hit the lowest levels CBB has ever recorded,” the report states. “For the first time, it looked like firms were encountering genuinely harmful deflation.”
Falling prices, whether it is commodities, real estate, or wages, indicate there is too much supply. Falling prices resulting from gains in productivity aren’t bad. It’s bad if they fall because of oversupply, which makes servicing debt a lot harder.
So the last man standing is the labor market, long known to be the most important factor influencing the decision makers in Beijing. If the CBB analysis is true, the situation is also far worse than expected.
As a reminder, reliable employment data is notoriously hard to come by and maybe the most unbelievable of all of the official data out of China. The official unemployment rate has hovered around 4 percent (4 percent to 4.3 percent to be precise) for the last 10 years.
source: tradingeconomics.com
“Job growth took a pronounced hit, while labor supply (both skilled and unskilled) became less available. … If labor market weakness persists, Beijing will feel increasing pressure to ramp up its policy response,” the report states. Judging from the fiscal deficits China started to run this year, it may already feel the pressure, as 16 percent of companies surveyed fired people.  
The mining sector also suffered, with more firms reporting decreases in revenue rather than increases.
Stimulus Doesn’t Work
CBB, however, finds both monetary and fiscal stimulus don’t work, as two classic outlets for government spending (transportation and transportation construction) had profits disappear and revenues plunge. The shipping industry fared the worst, with more companies reporting a drop in revenues rather than an increase.
On the monetary side, China cut interest rates six times this year, but CBB says the credit transmission mechanism is broken, because companies don’t want to borrow. “The share of firms borrowing hit a record low of 14 percent, despite a lower cost of borrowing from banks,” the report states. Over the four years of the survey’s existence, the percentage of firms that said they were borrowing money fell by two-thirds.
This is “good for restructuring, bad for short-term growth.” Not surprisingly, the number of firms reporting an increase in capital expenditure also fell to a record low.
In financial markets, the CBB report shows a remarkable decline in appetite for credit, as yields rose to 9 percent and issuance halved compared to the third quarter. Safer bank loans yield less compared to last quarter, where riskier non-bank loans yield more. A classic case of selective lending only to safe creditors who don’t need any money.  
Real estate was more or less stable, residential construction even showed an increase in firms reporting gains.
Another relative positive was retail spending which increased at 46 percent of the firms, but the increase was lower than last quarter’s. So the consumer is not dead, but it’s also not coming to the rescue as policy makers would have you believe.  
As Epoch Times reported recently, the regime is stimulating on all fronts to stem the tide. But CBB is not too optimistic it will work out and urges the regime to really reform the economy.
“Some policy choices simply will not work. … It’s past time the ‘stimulus mafia’ rethinks its Pavlovian responses. Reform or bust.”
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.

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