• Fri
  • Dec 26, 2014
  • Updated: 11:08am

China retail sales lead business activity weakness, survey finds

Despite sagging business activity, signs of stability in credit availability and a rise in new factory orders indicate further slowdown is unlikely

PUBLISHED : Friday, 21 March, 2014, 9:01am
UPDATED : Saturday, 22 March, 2014, 4:58am

Slowing retail sales stand out as the primary drag on the mainland's economic growth so far this year, while activity in almost every other business sector sagged, the latest quarterly China Beige Book survey found.

But signs of stability in the availability of credit and growth in new domestic and export orders for the massive factory sector were indications that a further deterioration in the economy might be averted.

"The pace of Chinese economic expansion has plainly slowed," Leland Miller, president of survey publisher CBB International, said in a statement accompanying the results. "There is certainly gloom, but also perhaps a bit of light."

The fall-off in retail extended far beyond luxury goods, hurt by the government's nationwide corruption crackdown, and only firms in the transport sector reported better revenues in the first quarter of this year than in the fourth quarter of last year.

Gains in retail revenues were reported by just 54 per cent of survey respondents, down from 61 per cent in the fourth quarter and 73 per cent a year ago. Retail sales over the Lunar New Year period were the weakest in at least three years.

Revenues, sales, profits and wages were all weaker than a year ago for firms surveyed in one of the most comprehensive nationwide polls of business conditions in the world's second-biggest economy.

Tightening credit that had been a problem in previous quarters stabilised, but access to finance for firms was only slightly better than the nine-quarter low in the fourth quarter.

Loans to new customers edged up, with 17 per cent of bankers surveyed saying more than 30 per cent of loans went to new customers, up three percentage points from the fourth quarter.

Meanwhile, the spread between interest rates paid on loans made by banks and those made by non-bank lenders pushed out to its widest in a year, indicating that capital is getting more expensive for firms that cannot borrow from mainstream lenders.

But a bounce back for the factory sector was flagged by data showing solid growth in new domestic and foreign orders everywhere except the northeast of the country. Firms in the main manufacturing engine, Guangdong province, reported stronger orders.

"The results do not indicate a boom later in 2014, but they do suggest that linear forecasts of continued deterioration may be overly simplistic," Miller said.

A number of major international investment banks have cut their China growth forecasts for this year in recent weeks as official data has indicated lingering export weakness, a softening of industrial output and an easing of credit growth.

The China Beige Book survey, modelled on the United States Federal Reserve survey of the same name, polled executives from manufacturing, retail, services, transport, property and construction, and farming and mining firms. Respondents run businesses of every size, from micro firms with a handful of staff to large companies employing more than 500 workers.

The survey also canvassed opinions from bank loan officers and bank branch managers.


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Another way out for our government to maintain a balanced budget and spend more on infrastructure and the like, is to set up an off-budget account, like Japan’s ‘Fiscal Investment & Loans Program’ or FILP (or China’s local government financing vehicle), to circumvent the Basic Law balanced-budget stipulation.
In the future, balancing the budget is thus partly achieved by changing the way the government does its accounts, by pushing some public spending off-budget and instead through FILP.
Filp spending is financed entirely by borrowing, say by issuing long term (10-year, 20 –year or 30-year) government treasury, enlarging the scale of the present Hong Kong Government inflation-indexed bonds, and/or using (part of) the government pension schemes surpluses.
Perhaps part of the future land-sale receipts can also be considered.
Most of the money collected can then be spent on further public works.
FILP is one way for the government to boost public spending without unbalancing the budget.
And without distorting Hong Kong's traditional world-famous low-tax system.
In principle, Hong Kong's aging population and more and more sophisticated economy will mean less need for both public and private investment in the future.
But, to maintain the city's future competitiveness in the region (like the need to build a third airport runway), our government had better have a two-hand preparation.
Using the coming excess savings to finance the government’s borrowing (in the form of long-term treasury) also means more interest income given to the local treasury-holders to help finance their expected increase in expenditure (and smaller savings) after retirement.
Perhaps the Basic Law’s balanced-budget stipulation should not be interpreted on a yearly basis, but in terms of a period, say 10 to 15 years.
To solve our future potential budget deficit problems, in addition to changing our traditional low-tax-rate structure, it also makes sense for our government to borrow to finance part of our present public investment.
Unlike private borrowing to finance consumption, the increase in financial debt by our government is matched by an increase in the city’s physical assets.
To finance all public works spending out of taxes means that today’s taxpayers pay for benefits tomorrow’s taxpayers enjoy --- the latter may reasonably be expected to shoulder some part of the cost, in the form of debt interest or principal repayment.
Limiting present investment to what can be covered out of current taxes inevitably distorts the economy.
It puts the growth in sorely-needed public investment in a strait–jacket, while spurring private investment with ample and cheap credit.
Provided that the return on public sector investment is comparable with that obtainable from private sector investment, there is no reason why it should not be a claim on private savings.
(From ‘Japan: The Coming Collapse’)
As Hong Kong’s population is getting older, and before most people retire, private savings is expected to shoot up (to prepare for their retirement).
I don’t think, now, these excess private savings will be used to finance Hong Kong’s trade surpluses, considering our very small manufacturing sector (of course there is a possibility that one day this sector will become more important than it is right now).
Thanks to the balanced budget stipulation in the Basic Law, our government can’t use budget deficits and incur debts to finance her present massive infrastructure and other needed expenditures that are useful to the society.
So, given the still-low tax rates, the coming excess savings will either stay in the banks, lent to the local businessmen through the banks, invest in the local stock and property market, buy gold, invest abroad (say, lent to the Chinese property developers, or through those RQFII schemes), and so on.
In Japan ( before the early 1990s), work was readily available, even for the old.
The services sector was deliberately sheltered and dismally inefficient.
Massive over-employment existed in the service sector (and perhaps still does).
Four people fill up your car at a petrol station: one puts in the fuel, a second cleans the windscreen, a third empties all the ashtrays and trash, and the fourth takes your money.
Old men trim lawns to perfection.
Thousands of small family-run stores dominated retail distribution, protected by law from competition from big and efficient supermarkets.
The consumers paid the costs in inflated prices.
(Not to mention the fact that almost no or very low taxes needed be paid by the store owners.)
Service sector inefficiency was the Japanese surrogate welfare system.
It meant that almost everybody was able to contribute something in return for the money they were paid.
Nobody wanted to receive charity from the state.
(The social role of the service sector still explains Japanese resistance to its reform.)
(From ‘Japan: The Coming Collapse’)
Li wants to maintain a relatively high GDP growth rate this year (7.5 percent) to prevent a more-than-expected drop in the employment level.
This goal may be at odds with another goal of rebalancing her economy toward more domestic consumption, which may require a lower growth rate than that specified by Li.
Indeed there is another way to maintain a high employment level in China.
We shouldn't forget the country's service sector.
Well, by learning from the Japanese.
I just tell you what can be done in China.
Whether they should be done is another issue.
(Chinese readers: ****xugao.blog.caixin.com/archives/69122)
What’s more, the still-high market interest rate in the shadow banking sector creates the interest rate differential which keeps on attracting foreign hot money into the country.
It also encourages China's property sector to obtain cheaper foreign loans, say from Hong Kong.
More RQFII products mean more capital inflow.
The money inflows and the rising yuan mutually reinforce each other, hurting further those SME exporting firms.
It also gives the central bank the mistaken impression that the already (perhaps severely) overvalued yuan has to revalue further.
The triple whammy of high borrowing rate, high yuan exchange rate, and high wage rate, has been hurting the SMEs and hence the whole country, and caused the business activity weakness found by the survey and the recent PMI figures.
And it’s much more painful to deleverage at high interest rate --- it’s like having a surgery without using anaesthetic.
Too-fast interest rate liberalization may not be suitable for China at present.
Even before the next formal release of the banks’ deposit rate cap, the proliferation of internet financing (say, Alipay’s YuEBao) and shadow banking market (the sale of trust products, etc) have already raised the deposit rates that can be obtained by the Chinese people.
The formal relaxation of the deposit rate cap of the banks in the next two years will reduce the banks’ net interest income, their net profit and hence their ability to absorb the future potential massive loss from the bad loans.
It will also raise the interest income of China’s depositors, suppress the prevailing financial repression in the country, encourage the Chinese consumers to save less and spend more, and reduce the attraction of those internet and trust products.
With the implicit central government guarantee (perhaps a vestige of socialism) still intact, scarce credit resources still can’t be allocated to their most efficient uses, because the crowding-out effect is still there.
But replacing the guarantee may mean much higher borrowing rate in the shadow banking sector, because the lenders will then demand much higher lending rates to compensate for the high risks incurred by them. As a result, even less credit resources go to the SMEs, the largest employers in the country, frustrating one of the main purposes of interest rate liberalization.
Is interest rate liberalization really that good?
The quick answer is yes, because it signals the country’s incremental progress in modernizing the country’s financial system.
When China still retains a government–mandated cap on how much the nation’s policy banks are allowed to pay on savings deposits, the lending rate restriction is released first.
The SOEs get most of the credits provided by the banks. Some of these loans cause wasteful investment and overcapacities in some industries.
Many innovative and more efficient SMEs can’t (easily) obtain loans from the policy banks.
In the shadow banking market, the SMEs still can’t obtain all the loans they want, even at very high borrowing costs, because they are crowded out once again by the SOEs and the local government financing vehicles.
The SOEs and the local governments simply want the loans at all costs.
And the lenders are willing to lend to them, knowing that they are all implicitly guaranteed by the central government.
As a result, the relaxation of the lending rate cap only serves to greatly enrich the policy banks, because the net interest income is enlarged, but without directing scarce resources (sorely-needed credit) to their most-valued uses (the SMEs).
China is not alone.
The industrialized nations are now facing their greatest economic threat in nealy a century --- a troubled middle class losing its purchasing power to drive world growth.
The "jobless recoveries" in the U.S. and Europe are partly attributable to the inability of their governments to implement aggressive expansionary fiscal policies (because they want to reduce their budget deficits),
and monetary policies alone are insufficient to end the Great Recession.
Without this purchasing power, investing in innovation loses its main appeal --- the ability to profit from new products and ways of doing things sold into a mass market that can afford to buy them.




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