China Beige Book Warns Economic Slowdown Has Begun

When it comes to the global economy, few things matter as much as China, the trajectory of its economy and especially the pace and impulse of its credit creation, which is ironic because virtually all data coming out of China is fabricated and manipulated, and thoroughly untrustworthy, either on purpose or "by accident."

The latest example of the former was highlighted over the weekend, when we discussed that a nationwide Chinese audit found some local governments inflated revenue levels and raised debt illegally, once again making a mockery of China's credibility on the global stage. As Bloomberg reported ten cities, counties or districts in the Yunnan, Hunan and Jilin provinces, as well as the southwestern city of Chongqing, inflated fiscal revenues by 1.55 billion yuan, the National Audit Office said in a statement on its website dated Dec. 8.

An even more blatant example of the former was highlighted in October ahead of China's Communist Party Congress, when the local securities watchdog literally "advised" some loss-making companies to avoid publishing quarterly results ahead of the Congress as authorities sought to ensure stock-market stability during the critical gathering of China's political elite.  As a result, at least 17 Shenzhen-listed companies announced delays to their earnings reports from Oct. 20 to Oct. 24, up from three during the same period last year.

However, now that the Party Congress is long over, China's recent economic data offer a "warning for 2018" now that Beijing's leaders are less motivated to prop up fake "growth" for purely optical purposes. That is the opinion of China Beige Book, and its president Leland Miller who said that "Incentives to ensure the economy was growing smartly at the time of the Communist Party Congress do not apply as next year wears on," CBB president Leland Miller and chief economist Derek Scissors said in a report released on Wednesday.

According to a private survey by CBB International, which collects anecdotal accounts similar to those in the Federal Reserve’s Beige Book, Q4 results already show some signs of a transition to slower growth,  The most recent sampling of 3,300 Chinese businesses showed:

  • Hiring stopped accelerating due to a strong base of comparison
  • Manufacturing orders also stopped accelerating 
  • Inventory accumulation "is too fast for comfort"
  • Sales-price inflation is weaker than in the second quarter
  • Wage gains have stopped accelerating

Come to think of it, the CBB data is not that different from the official Chinese data which showed continued slowdown across most economic verticals:

 

"None of these is genuinely alarming yet, and none would be out of place in a typical quarter," the CBB's Miller wrote. "But the first results after a CPC are not a typical quarter. If you expect a noticeable slowdown in 2018, the first post-Congress returns support those expectations."

To be sure, even here there is confusion: while at the 19th Party Congress, which marked the start of President Xi Jinping’s second five-year term, top leaders signaled less emphasis on pursuing economic growth at all costs, and greater dedication to deleveraging, during the main economic planning conclave in December which set priorities for 2018, they pledged to focus on "critical battles" against financial risk, pollution and poverty in coming years. Meanwhile, deleveraging - Xi Jinping's endless crusade - was strangely forgotten. Indeed, as Goldman observed last week, "there was no explicit mention of deleveraging" as "recent policy statements increasingly use the phrase "control of leverage", in our view likely a reflection of increasing realism in policy making." This significant policy reversal prompted the WSJ last week to report that Beijing has effectively given up on its deleveraging pledge.

Leverage or not, the table below - courtesy of Bloomberg - shows CBB’s breakdown of how support for the expansion may erode:

Furthermore, evidence from the retail sector doesn’t support the government’s claims of a consumption boom, CBB said. While some large firms have strong sales and profitability improved this quarter, retail revenue growth finished last among major sectors, Miller and Scissors wrote.

"Retail’s performance is decidedly uninspiring. Revenue, capex, and hiring are inferior to manufacturing, while inventory growth is much higher."

The good news: overall hiring has held up and was generally in line with the prior quarter, with 48% of firms staffing up and 3% cutting workers. "Job growth remained stronger at state firms than private, regardless of company size," CBB’s survey found, although as we will show in a subsequent post, while hiring may remain strong, wages are tumbling in a troubling indication that China's middle class is set for imminent disappointment and anger.

Meanwhile, inflation in wages, prices, and input costs were also roughly the same as in the prior quarter, and were moderately faster than last year, the report said. Profit growth improved.

That said, despite predictions of gloom as we enter 2018, the world’s second-largest economy proved bears fully wrong this year, exceeding analyst estimates in the first and second quarters, and is now on pace for the first full-year acceleration in growth since 2010, with GDP seen growing at 6.8% this year and 6.5% in 2018. There is a problem: this growth was on the back of a near record credit impulse since the February 2016 Shanghai accord, an impulse which is now over.

Which means that all else equal, and absent another gargantuan credit injection in the coming months, China's bears are about to have their day in the sun all over again.

Comments

Nobodys Home Wed, 12/27/2017 - 22:34 Permalink

All of a sudden tonight for the first time I can't access ZH with TOR. This is the error message:

 

www.zerohedge.com uses an invalid security certificate. The certificate is not trusted because the issuer certificate is unknown. The server might not be sending the appropriate intermediate certificates. An additional root certificate may need to be imported. Error code: SEC_ERROR_UNKNOWN_ISSUER

EternalAnusocracy brain_glitch Thu, 12/28/2017 - 00:07 Permalink

Dear Bitchezz:  I suggest everyone tell Tylers that they have one day to bring back the voting system.  I think most of us old timers here were already getting sick of the bullshit at this once good website.  Now, with the new tinkering, its bye bye time.

 

It was nice being in the fight club with you all.  I might still come read an article or two here but there in no joy in commenting without the ability to upvote/downvote.

Thanks tyler (not!)  FU.

In reply to by brain_glitch

EternalAnusocracy brain_glitch Thu, 12/28/2017 - 00:07 Permalink

Dear Bitchezz:  I suggest everyone tell Tylers that they have one day to bring back the voting system.  I think most of us old timers here were already getting sick of the bullshit at this once good website.  Now, with the new tinkering, its bye bye time.

 

It was nice being in the fight club with you all.  I might still come read an article or two here but there in no joy in commenting without the ability to upvote/downvote.

Thanks tyler (not!)  FU.

In reply to by brain_glitch

EternalAnusocracy brain_glitch Thu, 12/28/2017 - 00:08 Permalink

Dear Bitchezz:  I suggest everyone tell Tylers that they have one day to bring back the voting system.  I think most of us old timers here were already getting sick of the bullshit at this once good website.  Now, with the new tinkering, its bye bye time.

 

It was nice being in the fight club with you all.  I might still come read an article or two here but there in no joy in commenting without the ability to upvote/downvote.

Thanks tyler (not!)  FU.

In reply to by brain_glitch

EternalAnusocracy brain_glitch Thu, 12/28/2017 - 00:08 Permalink

Dear Bitchezz:  I suggest everyone tell Tylers that they have one day to bring back the voting system.  I think most of us old timers here were already getting sick of the bullshit at this once good website.  Now, with the new tinkering, its bye bye time.

 

It was nice being in the fight club with you all.  I might still come read an article or two here but there in no joy in commenting without the ability to upvote/downvote.

Thanks tyler (not!)  FU.

In reply to by brain_glitch

Deplorable Wed, 12/27/2017 - 23:09 Permalink

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<img src="pic_mountain.jpg" alt="Mountain View" style="width:304px;height:228px;">

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LittleMaestro Thu, 12/28/2017 - 00:44 Permalink

So... To sum up... Basically there is some anecdotal evidence here and there by a guy named Derek Scissors that the Chinese economy isn't growing as fast as it used to. But that, generally, it's doing pretty well. And that some local governments have inflated revenues by $250 million dollars (in a country with four times the population of the USA). Clearly it's time to panic. 

ds Thu, 12/28/2017 - 02:03 Permalink

What a long spin over what the Party wants to wind down a Ponzi economy. It is a State controlled Economy where the major parts like SOEs have to comply. Wake us up only when the desired long soft landing is derailed. It is to be long to manage employment. Beige book, etc and quarterly numbers (fake or otherwise) are unimportant where their financial economy is not driving stability. Only global financial markets can affect them; they know and they have said that Western economic management with their CB endgames are not for them. 

fbazzrea Thu, 12/28/2017 - 03:09 Permalink

it's an obvious business shift transferring costs of maintaining their own servers to a newsletter format using email-provider servers... plus the DS bonus of eliminating a powerful collective of independent dissenting voices.

Let it Go Thu, 12/28/2017 - 06:42 Permalink

Recently Zhou Xiaochuan, the governor of the People’s Bank (PBOC), spoke of “fierce market reactions” and a possible Minsky Moment, the tipping point when credit cycles break and euphoric booms collapse under their own weight. Mr. Zhou told China Daily that asset speculation and property bubbles could pose a “systemic financial risk” made worse by the plethora of wealth management products, trusts, and off-books lending taking place throughout the country.

 http://China,China, China, Its All About China And Japan.html

Zepper Thu, 12/28/2017 - 08:36 Permalink

Basically the synopsis of the book is... U.S.A. has a really fucking smart President who understands that globalization really means FEED CHINA! and as such our growth will stall during his presidency and if he is successful it will utterly collapse with our most fucked up political system and our 1.4 billion borg will go hungry.