China Beige Book

Primary research on China

Conference call with Leland Miller

Leland described how China Beige Book (CBB) gathers data from 3,300 firms across China to determine the real state of the economy. Q1 data was the worst they had ever seen with every sector and every region contracting. Not that surprising given COVID, but it was interesting that the latest data showed that. despite the reopening of the economy. it was not bouncing back to growth. Meanwhile, the Government was sending people back to work and talking of a V-shaped recovery. Once COVID went international, Beijing realised they could not control the recovery with domestic resilience, it was a story of global recovery, so they have published a strong state-driven narrative to say that China has vanquished the virus. April data showed that despite 91% of companies having reopened, 42% are unable to operate at more than 50% capacity and only 4% say they are back to 100% capacity.
Over three fifths of businesses attribute revenue declines in April to continuing effects of COVID even though the official narrative is that they have beaten the pandemic. 81% of surveyed executives are worried about re-infection within 3 months. 69% of companies say that the current level of growth in April will be as good as it gets for the year. April may be better than March, but it is still in contraction. The government might have to lower GDP targets or perhaps it will no longer report GDP.
If we look at credit, CBB saw relatively low levels in Q1. This data was suppressed by physical disruptions as people could not access banks or shadow finance. This is likely to change in Q2 as early data shows that there is credit uptake. Are we going to see heavy infrastructure stimulus as major international trading partners are shut down? Will the old playbook of build, build, build return in desperation to hit growth targets? This is what CBB are trying to determine through their data over the coming weeks.
In recent years, China under Xi, has had an unbridled desire to play a more important, more high-profile role internationally. This has now completely reversed, China is on a diplomatic offence against other countries; for example, accusing the US of planting the virus or the Italians for starting it. They had an opportunity for a soft power push by sending masks around the world and establishing goodwill, but they have chosen a completely different path.
Leland also discussed the misleading PMI numbers that are based on a handful of public companies rather than private ones and that there is no adequate proxy for the Chinese GDP growth number. There is a trickle of funds coming into China, but not the flood you would get if there was a real bond market; however, it is the commodity exporting countries to China who will be the ones in real trouble long term. He also believes that the currency is unlikely to be devalued.