While some sentiment indices in China suggest economic conditions in the nation are continuing to improve, that view is certainly not uniform in nature.
Based on the latest quarterly survey of banks, companies and households conducted by the People’s Bank of China – a report that captures the views of 20,000 urban households, 5,000 businesses and 3,100 banks – sentiment towards the economy deteriorated sharply despite relative stability in business profits, orders and labour market conditions.
“The business survey for Q3 makes for gloomy reading,” said Chang Liu and Mark Williams, economists at Capital Economics in a research note released overnight.
“The headline index on firms’ confidence in the state of the economy fell to its lowest since the trough in 2009. Firms’ sentiment about their own circumstances deteriorated too, with this index falling below 50 for the first time since 1999”.
The results are published as diffusion indices, akin to PMI reports, with a reading over 50 indicating an improvement relative to the preceding quarter.
Despite the ugly sentiment gauge, Liu and Williams suggest that the report was not all doom and gloom, pointing out that the decline in indices tracking individual economic variables was far less severe than that seen for sentiment.
“Profitability is at a similar level to the business conditions index but has been fairly stable over the past three years. Domestic and foreign orders declined this quarter, but both are above their level in Q1,” they wrote.
In what will no doubt create a challenge for policymakers who are trying to engineer an economic rebalancing away from export and industrial-led growth to that driven by consumption, gauges on credit demand and household income weakened compared to levels in the preceding quarter.
Liu and Williams point to the deflating stock market bubble as a catalyst behind the weakness in both gauges.
As happened when the equity bubble burst in 2007 and 2008, the slide in equity prices this quarter has caused this shift to reverse,” they said.
“A fair number of those turning their back on investment say they would prefer now to spend rather than save – the share of spenders overall is now the highest since 2009.”
With many pinning their hopes for an economic recovery in China led by recent improvements in the nations residential property market, it was interesting that survey respondents indicated that they were less inclined to buy a property during the quarter.
“The share of respondents saying they are on the verge of buying a house has dropped back since Q2 but remains higher than a year ago,” they note.
“The turnaround in property sales is one of the more positive recent developments in China. We don’t expect it to trigger a renewed construction boom given the overhang of unsold inventory and the fact that, even after the construction slowdown, property completions are continuing at a rapid rate.”
Today China starts the week-long golden week holiday. Given the recent deterioration in Chinese economic data, markets should be on alert for pending policy announcements that may arrive during this holiday period.