China growth humming but may be dimming in 2018

Progress on reducing debt and industrial capacity is proving elusive, according to CBB


BEIJINGThe world’s second-largest economy keeps on delivering positive surprises this year, such as a leap in industrial profits last month. That isn’t stopping worries gathering that 2018 won’t be as bright for China.

Industrial profits increased 24% in August from a year earlier, the most in four years, compared to the 16.5% pace a month earlier, the statistics bureau said yesterday. A satellite-image gauge of manufacturing facilities showed activity was the strongest in six months, and sentiment in the steel industry is at a 12-month high. International investors are also more bullish on the Chinese outlook.

At the same time, as much of the current mood could depend on the short-term profit gains delivered by government-mandated cuts in steel and other industrial capacity, different indicators could be a better guide of things to come. A gauge of activity at small companies edged down and an index of sales-manager sentiment weakened. That fits with concern expressed in the China Beige Book (CBB) this month that progress on reducing debt and industrial capacity is proving elusive.

President Xi Jinping has been overseeing a reassertion of control over the economy and financial system this year, in the lead-up to the twice-adecade Communist Party leadership gathering scheduled to convene next month in Beijing. With some track record in calling pivot points, the Beige Book report, which collects anecdotes on the economy from more than 3,000 firms, said its survey evidence rebuts some of the key perceptions about the economy’s progress.

Capacity cuts in steel and other commodities aren’t happening in reality. Corporate borrowing continues to rise; deleveraging is a myth. The economy isn’t re-balancing to services from manufacturing. China isn’t reflating in the sense of faster growth, but profits are up.

“With the Communist Party Congress just weeks away, leadership can breathe easy,” CBB president Leland Miller and chief economist Derek Scissors said in the report. “The worry is not how the economy is faring now, but where it is headed. Beneath substantial accomplishments lies a potentially darker story for 2018.”

CBB said in its prior report that China’s economy remained strong in the second quarter (2Q) as the Communist Party sought to prevent any pain ahead of the congress. Policy support, a lack of shocks and the looming political transition offered a best-case scenario for the economy, they said.

Interest rates jumped and borrowing slipped in the 2Q, but that amounted to slower credit growth, not outright deleveraging, CBB said in the report.

In the 3Q, companies borrowed at the second-highest rate in four years, as borrowing costs “nose-dived nationally to accommodate,” CBB said. Corporate borrowing remains robust and deleveraging isn’t yet taking place, according to the report.

“Deleveraging hasn’t gotten off the ground,” Miller and Scissors wrote. “The pain from any true deleveraging lies ahead. And that leaves 2018 hanging in the balance.”

While China has said it is cutting excess capacity — which has boosted metals prices — CBB’s survey shows capacity expanded marginally in the third quarter after spiking in the April to June period, the analysts said. “Markets also need to be reminded that capacity cuts are only the first step,” they said. “The payoff is supposed to be lower output, which is nowhere in sight.”

Labour force growth accelerated, with nearly half of the firms adding workers and almost none cutting jobs. That’s a positive before the congress because “if policymakers want to make sharp changes, wise or unwise, they can do so with less political risk,” the analysts said. — Bloomberg