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"Alarming" Chinese Beige Book Reveals Dire Economic Situation, Fewest Profitable Companies On Record

Tyler Durden's picture




 

It’s notoriously difficult to get a read on the health of China’s economy. 

The ambiguity is in large part attributable to the NBR’s tendency to goalseek the data in order to ensure that growth remains in line with the Party’s “targets.” To be sure, virtually no one believes the official numbers and when it comes to GDP, the situation is complicated by what we’ve called Beijing’s deficient deflator math, which causes China to habitually overstate economic growth during times of rapidly falling commodity prices.

Although sellside estimates are useless (the Street is effectively forced to produce forecasts they know are erroneous because trying to estimate actual output in China would mean missing the “official” mark every single time) we can get a decent approximation of how the country is really doing by looking at the Li Keqiang index, which tracks electricity consumption, rail cargo, and loans.

Another way to assess the health (or lack thereof) of the world’s engine of global growth and trade is the CBB, or, China Beige Book which is modeled on the Fed’s survey of the U.S. economy. According to the CBB, the Chinese economy deteriorated markedly in Q4 and the weakness was broad-based.

Despite the fact that  “official data on industrial production, retail sales and fixed-asset investment all exceeded forecasts for November, while consumer inflation perked up and a slide in imports moderated,” the CBB suggests “national sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months,” Bloomberg reports.

The profit reading is "particularly disturbing," with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller said. Although retail and real estate weren’t terrible (and that’s pretty much all you can hope for these days), manufacturing and services slumped, as revenues, employment, capital expenditure and profits all came in weaker.

China is of course attempting to mark a difficult transition from an investment-led, smokestack economy to a consumption and services-driven model. That’s proving to be easier said than done, a point Miller underscored in the CBB’s report. There’s “pervasive weakness," he said. "The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true."

Miller continues: 

"More concerning than overall growth weakness was degradation of two components of the economy that were previously overlooked as sources of strength: the labor market and the impact of inflation. Given growth in input prices and sales prices slipped to record-lows while firm performance metrics fell, it looked like firms were encountering genuinely harmful deflation."

 

"The interest of firms in both borrowing and spending continues to decline, suggesting it’s past time the ‘stimulus mafia’ rethinks its Pavlovian responses. Reform or bust."

In other words, both fiscal stimulus and monetary easing have failed to rescue the Chinese economy from the dreaded "hard landing" and from a deflationary death trap. Recall also that the credit impulse simply rolled over and died in October as an acute overcapacity problem combined with a negative overall economic outlook stifled demand for credit while rising NPLs made banks wary of lending.

Note that this is entirely consistent with what we said in "Credit Suisse Warns On China: "Some Companies Are Having To Borrow To Pay Staff Salaries."  "The government has become more active in terms of counter-cyclical measures since late summer [and] the PBoC has injected liquidity into the policy banks, through its selective easing program, and policy banks have invested in special infrastructure projects approved by planning agency NDRC," Credit Suisse wrote earlier this month. Here's the bank's assessment of how effective Miller's "stimulus mafia" has been: "However, the impact of these stimulus measures on the real economy has been weak." 

And so it is, as Miller writes, "reform or bust." We'll leave it to readers to determine which is more likely.

 

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Fri, 12/18/2015 - 10:05 | 6938795 -.-
-.-'s picture

"reform or bust."

 

This has, historically, not worked out too well for the people of China...

Fri, 12/18/2015 - 10:16 | 6938818 Plunge Protection
Plunge Protection's picture

You short you die!!!!

Fri, 12/18/2015 - 10:22 | 6938834 eforce
eforce's picture

Sum Ting Wong?

Fri, 12/18/2015 - 11:11 | 6939045 Wannabe_Oracle
Wannabe_Oracle's picture

Dude, I'm digging the seeing eye, but the 'sumtinwong' is kinda weathered..

Fri, 12/18/2015 - 21:54 | 6941621 tarabel
tarabel's picture

 

 

How many people remember the fourth member of the crew?

Ding Bang Ow

Fri, 12/18/2015 - 15:35 | 6940344 MSimon
MSimon's picture

A "ting" is a pot. Evidently you do not have enough. Or too much.

Fri, 12/18/2015 - 10:06 | 6938800 unrulian
unrulian's picture

"shields up"

Fri, 12/18/2015 - 10:07 | 6938802 Dr. Engali
Dr. Engali's picture

Just do what we do when companies can't make money, change the accounting rules.

Fri, 12/18/2015 - 10:08 | 6938804 user2011
user2011's picture

i heard chinese gov tax the shit out of everyone in China to recoupe the losses in stock market intervention. So, both the expandable income and budgets are dropping, so no wonder China is going down.

Fri, 12/18/2015 - 10:12 | 6938809 Government need...
Government needs you to pay taxes's picture

China should try a mandatory redristributive health care 'free shit' program.  That should fix its economic woes AND keep its people healthy and safe. 

Fri, 12/18/2015 - 10:15 | 6938815 G.O.O.D
G.O.O.D's picture

Better get lawyers guns and money seems the shtf.

Fri, 12/18/2015 - 10:17 | 6938820 InnVestuhrr
InnVestuhrr's picture

Yeah, China and its currency are surely going to replace the USA and USD any minute, they are SO SO SO ready to be the world monetary, economic, financial and military leader.

I had to lock my office door and turn off the phone to block all the institutional and high-net worth investment clients who are demanding that I move their money from the boring risky USA to the much more exciting safer China.

[I had to take tranquilizers to stop laughing long enough to write this]

Fri, 12/18/2015 - 10:26 | 6938852 madcows
madcows's picture

The IMF has now included them in the bucket of currencies.

China and Russia now trade between each other using their currencies.  Sweden has signed up for this as well.

So, whether the Yuan becomes the world currency or not is irrelevant.  The real issue is that the dollar will no longer be the world's reserve currency.  And along with that, the government can no longer borrow TRILLIONS each year to fund their profligacy.  So long america.

Fri, 12/18/2015 - 11:43 | 6939212 InnVestuhrr
InnVestuhrr's picture

You obviously have a lot more words than knowledge, understanding, money and investments.

Does your mommy know that you are on an adult web site ?

Fri, 12/18/2015 - 10:32 | 6938875 nosam
nosam's picture

The way I see it, the only country not set up for failure is India. Hard as it is to believe, the Rupee may be the next reserve currency.

Fri, 12/18/2015 - 10:48 | 6938931 Arnold
Arnold's picture

Two of three Pakies say no.

Fri, 12/18/2015 - 11:20 | 6939093 InnVestuhrr
InnVestuhrr's picture

Thank you for the deepest longest laugh I can remember.

The ONLY way that you could write that is if you have never been to India and tried to start and run a business there.

Fri, 12/18/2015 - 12:29 | 6939458 Loucleve
Loucleve's picture

India has nothing.  Nothing.  Think Burma.  No really.

Business leaving China.

Fri, 12/18/2015 - 10:21 | 6938830 Threeggg
Threeggg's picture

This is what happens when you have a currency war in every country that prints. This is not a currency war between countries, but A currency war inside those countries. Between electronic currency created on a keyboard and currency created through labor. This wont end well.

Fri, 12/18/2015 - 10:22 | 6938832 Dazar Nummers
Dazar Nummers's picture
China maintains INSCRUTABILITY and endures.  The West becomes Chop Suey.
Fri, 12/18/2015 - 10:25 | 6938847 Lady Jessica
Lady Jessica's picture

True strength will always speak for itself.  What can inscrutability be other than a veil concealing weakness?

Fri, 12/18/2015 - 12:28 | 6939447 Loucleve
Loucleve's picture

they have no deep water navy.

Fri, 12/18/2015 - 10:23 | 6938840 yogibear
yogibear's picture

Pyramid economics built with debt. Ghost cities good indicator.

 

Fri, 12/18/2015 - 10:29 | 6938863 I AM SULLY
I AM SULLY's picture

"China is clearly on its way to taking over the world."

(not)

(no safe havens)

(everyone is screwed)

Fri, 12/18/2015 - 10:37 | 6938889 CTG_Sweden
CTG_Sweden's picture

 

 

My impression is that is hard for the Chinese ta raise wages by increasing productivity in industries that primarily depend on the domestic market, although that should be an easy way to increase the prosperity in China quickly.

 

Perhaps the problem is the dependence on exports that require cheap labour. China needs this kind of exports in order to compensate for capital flight. Therefore, they don´t encourage increased wages and an accompanying increased productivity sufficiently.

 

My impression is that China should encourage production of goods which now are imported but can be produced in China rather than export cheap junk in order to pay for imported aircraft.

 

They also got to reduce capital flight. Capital flight seems to be the result of that it is too easy to make money in a way that the authorities may consider as illegal. I also suspect that if more of the economic growth would wind up at the lower classes as savings, the capital flight would be a smaller problem. Capital flight is an option for the rich, not for the middle and working classes. Rich people that have earned their money perfectly legal must be able to trust the government and not fear that all their wealth all of a sudden is confiscated.

 

I also suppose that the Chinese authorities should encourage conversion of debt to equity on a large scale.

 

Fri, 12/18/2015 - 12:01 | 6939320 CTG_Sweden
CTG_Sweden's picture

 

 

 

Another problem with China seems to be the quantitative targets for various parts of the economy: The politicians decide that local governments should see to that 1 million apartments are built instead of creating incentives for building apartments that make sense, or even worse decide that the economy should grow by a certain per cent figure and orders the local government to somehow reach that objective. And since the easiest way to create great growth figures is to build apartments they decide to do that.

 

Quantitative targets like they have in China is probably an important reason for malinvestment in China.

Fri, 12/18/2015 - 10:43 | 6938916 bshirley1968
bshirley1968's picture

China has a "beige book"?  Looks like the same clowns/crooks running our show set their game up.

Fri, 12/18/2015 - 10:49 | 6938936 reader2010
reader2010's picture

Last month I was in Xinjiang and I saw in my own eyes what the impact two thousand plus mile New Silk Road project in that particular province can bring. I am pretty sure sun is setting for the American Empire. What this beige book says is the explanations for why they need to further devalue RMB. That's it.

Fri, 12/18/2015 - 11:16 | 6939071 adr
adr's picture

Areas in China that allow for cheaper labor and cleaner resources are booming. Many factory owners are heading west and taking advantage of the new trade routes. Xinjiang will probably become the next powerhouse region in Asia. The old manufacturing centers like Dongguan are dying. Guangzhou is choking on pollution and shuttered factories.

Xiamen is fairly nice in the new areas. One reason why Macau is failing is because many of the businesses in the surrounding area are dying. The factory owner can't go gamble away his money if he isn't making any.

Sat, 12/19/2015 - 10:18 | 6942669 kappal_toba_dhu...
kappal_toba_dhurr_ne_thook's picture

I see East Turkmenistan being free of China in the near future. That is in the works. 

Fri, 12/18/2015 - 11:42 | 6939210 Tarjan
Tarjan's picture

I am in Sichuan and thus far see no signs of slow down.

Fri, 12/18/2015 - 11:08 | 6939026 adr
adr's picture

Has the USA successfully transitioned from a manufacturing economy to a service based one?

The answer is no.

There is no such thing as a successful service based economy.

Sat, 12/19/2015 - 10:16 | 6942667 kappal_toba_dhu...
kappal_toba_dhurr_ne_thook's picture

USA and China are the eyes of the storm about to befall the world.  I am just afraid that the rest of us are  going to be sucked into this black hole with them. 

Fri, 12/18/2015 - 11:08 | 6939028 commie
commie's picture

Yep, the BRIC is really going to kick the USA's butt

Fri, 12/18/2015 - 12:40 | 6939515 truthalwayswinsout
truthalwayswinsout's picture

First it was Japan and the Japanese were going to buy everything and if you don't learn how to speak Japanese you are in deep trouble......Geeeeee look what happened to them.

Now it is the Chinese and they are going to rule the world and if you don't learn how to speak Chinese (Mandarin or Cantonese) you are in deep trouble..... Just a few more years and they will be worse off then Japan.

What is the moral of the story. They are National Socialists. Their race wars are against the White Race, and in the case of China against the Japanese and the White Race.

Part of National Socialism is cronyism and in the end it always fails in a generation or two. The real problem is we are now National Socialists as well under Obama bin Laden and the race war is once again against the White Race. So we will be in the same place as they are in a generation of so.

The only thing that fixes National Socialism is a complete collapse.

Sat, 12/19/2015 - 10:15 | 6942666 kappal_toba_dhu...
kappal_toba_dhurr_ne_thook's picture

Sounds like you are talking about USA to me.  

Fri, 12/18/2015 - 14:33 | 6939991 divingengineer
divingengineer's picture

The system is inherently unstable. China sees growth because of low wages. Wages rise as labor becomes scarce. Productivity gains are usually demanded for rising wages. Automation is the next step and reduces employment but raises productivity. Automation commoditizes products and reduces profits. Reduced profits lead to lack of CAPEX. Lack of CAPEX leads to further reduced output and lack of profits.

The chase for profit is a fool's errand. Companies have sold out their own people and offshored their operations to SE Asia only to see that engine run out of fuel. The Chinese have gleefully accepted all that they could get and have a poisoned, burnt out hulk of a country for it. 

We all lost. 

Fri, 12/18/2015 - 15:44 | 6940381 MSimon
MSimon's picture

Companies should be chasing losses.

Fri, 12/18/2015 - 16:48 | 6940638 divingengineer
divingengineer's picture

The gains increasingly appear to have been transitory, leaving us with structural economic damage. A better route may have been through innovation, training, modernization and (presumably) increased productivity to meet our goals.  Instead the 'quick and easy' route was taken, with the help of perfidious politicians to reap the low lying fruit.

Like I said, we have all lost in the end.

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