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China Beige Book Shows Economy Stuck in Low Gear

Bloomberg | September 22, 2014

China’s economy remained stuck in “low gear” this quarter, with struggling retail and residential real-estate industries countering improvements in manufacturing and transportation, a private survey showed.

Growth in investment slowed further, borrowing costs rose and the share of firms applying for and getting bank loans remained at “rock bottom levels,” according to the China Beige Book, a report published quarterly by New York-based China Beige Book International. In contrast, hiring picked up and corporate profit margins improved, suggesting widespread government efforts to reignite growth are unlikely, it said.

“The absence of deteriorating conditions for most firms, both in terms of hiring and margins, does much to explain Beijing’s reluctance to introduce more large-scale stimulus,” Leland Miller, China Beige Book International president, said in a statement with Craig Charney, research and polling director.

Banks including Royal Bank of Scotland Group Plc and Barclays Plc reduced their economic growth forecasts after data for August showed the weakest industrial-output expansion since the global financial crisis and a 40 percent drop in the broadest measure of new credit. Premier Li Keqiang reiterated this month that the government will stick to targeted easing and can’t rely on monetary stimulus to spur growth.

A preliminary September reading of a manufacturing Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics due today will give a further indication of the state of the economy. The gauge’s August number fell to a three-month low and a separate PMI from the government also dropped.

Growth Stimulus

Premier Li in March set a 2014 target for an increase in gross domestic product of about 7.5 percent. Barclays and RBS this month lowered their estimates to 7.2 percent.

“Whenever weak growth is discussed, the next topic is invariably stimulus,” China Beige Book said. “Yet the true problem, still missed in most policy discussions, is that intense stimulus wouldn’t work.”

Credit participation has “cratered” over the past two years, the report said. “Most firms are reacting to the economic uncertainty by staying on the sidelines,” it said.

China’s response to the global financial crisis brought overcapacity, pollution and higher local government debt, so the nation can’t rely on fiscal funds for large investments, Finance Minister Lou Jiwei said in a statement posted on the People’s Bank of China website on Sept. 21.

Liquidity Injection

Even so, the central bank last week agreed to provide 500 billion yuan of short-term credit to the nation’s five biggest banks. The move was seen by some analysts as a temporary measure to overcome a potential cash crunch before the weeklong National Day holiday starting Oct. 1, while others saw it as monetary easing.

In the latest step aimed at supporting the sliding property market, China’s four biggest banks may loosen terms for mortgage lending. Criteria for loans to first-home buyers may be eased and people who have paid outstanding mortgages may be considered eligible for first-home status, the Guangzhou-based 21st Century Business Herald reported.

The China Beige Book survey showed growth in capital spending slowed again in the quarter to the lowest level since the survey began in 2012. The share of firms applying for and receiving loans held at record lows, according to the report.

Commercial Realty

While residential real estate was in contraction, home builders continue to report growth. Commercial realty and construction picked up, helping to explain the lack of collapses or defaults, China Beige Book said.

Among positive signs, the survey found corporate profitability improving, with margins in the current quarter growing at the healthiest pace in more than a year. The hint of employment weakness seen in the second quarter faded away, hiring improved and the jobs outlook was stable, it said.

The China Beige Book report, modeled on the U.S. Federal Reserve’s Beige Book business survey, was compiled from 2,187 10-minute interviews conducted from Aug. 11 to Sept. 2 through an online survey plus 28 face-to-face 20-minute interviews conducted from Sept. 9 to Sept. 22. Telephone interviews were also conducted with 160 bank loan officers and branch managers.

The previous survey showed the slowdown in the world’s second-largest economy deepening amid weakness in capital spending, hiring and wages and lower demand for credit.

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