China’s 2018 Slowdown Imminent

Chinese industrial firms continued to ramp up production in the fourth quarter, a private survey on Wednesday showed, but growth in wages and hiring slowed in a further sign of cooling momentum in the world's second-biggest economy.

The quarterly survey of thousands of Chinese firms by China Beige Book International showed "old economy" firms in the commodities sector sustained an increase in net capacity and production, Reuters reported.

Overall, wages and hiring ebbed in the December quarter, with the retail sector suffering the biggest blow on weak revenue, a hiring slowdown and worsening cash flow.

The results reinforce views that China's economy will slacken in 2018 after posting better-than-expected 6.9% growth through the first-three quarters of this year in the run-up to a key meeting of the ruling Communist Party.

For much of this year activity was supported by robust exports and a construction boom, thanks to a government-led infrastructure spending spree. But a relentless crackdown on debt risks has started to weigh on the economy.

"If you expect a noticeable slowdown in 2018, the first post-congress returns support those expectations," CBB said of its fourth quarter findings. Performance in the retail sector lagged that of other industries, the survey showed, despite Beijing's efforts to restructure growth towards domestic consumption from years of overreliance on exports and credit-intensive investment.

Authorities are in the second year of an extended campaign to foster sustainable growth by reducing high levels of debt across the economy, particularly targeting speculative lending in the financial sector and the housing market.

Mixed Results

While fourth quarter corporate borrowing fell from the third, and banks sold fewer 'shadow banking' investment products, average lending rates fell for a second quarter in a row, CBB said, underscoring the mixed results from the deleveraging process.

CBB highlighted weakness in the auto retail segment, where growth is slowing from a high base, while apparel and luxury goods saw rapid inventory growth, which could point to future weakness.

The fourth quarter survey again showed little evidence of supply-side reform, with industrial commodity firms adding net capacity and ramping up production, as well as boosting their payrolls.

Beijing said last week that it will push forward structural supply-side reform that saw outdated capacity taken offline, including surpassing a target for cutting 50 million tons of steel capacity this year.

Trade Deficit Widens

China’s trade deficit in services widened to $18.3 billion in November from $17.8 billion in October, the foreign exchange regulator said on Wednesday. The deficit was largely due to a $14.9 billion gulf in spending between foreign tourists and the Chinese, who splurge more abroad than do visitors to China, data from the State Administration of Foreign Exchange showed.

For the January-November period, China’s services trade deficit stood at $234.8 billion, versus a gap of $216.5 billion for January-October.

Shanghai stocks suffered their biggest loss in two weeks on Wednesday amid signs of slowing economic growth and year-end liquidity tightness.

Benchmark rates in the banking systems kept climbing in signs of liquidity stress. The one-month Shanghai Interbank Offered Rate climbed to 4.93% on Wednesday, the highest level since April, 2015. The 14-day repo rate rose as much as 10%, the highest level in four years.

Profits Fall

China's major industrial firms reported slower profit growth in the first 11 months, but saw progress in improving profitability and lowering debt levels, the National Bureau of Statistics said Wednesday, Xinhua reported.

Businesses with annual revenue of more than 20 million yuan (about $3 million) reported aggregate profits of 6.88 trillion yuan in the first 11 months, a 21.9% increase from one year earlier.

The growth marked a mild slowdown from 23.3% in the January-October period. In November alone, profits were up by 14.9%, down from 25.1% during the previous month and the weakest pace since April.

Combined revenue from main business was up 11.4% in the first 11 months, down from 12.4% in October.

NBS statistician He Ping said slowing price growth bit into corporate profits. "Primary calculation showed price changes... reduced profits by 94.4 billion yuan month on month, dragging down the profit increase by 13.8 percentage points," he said.