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."
"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.