The first trading day of 2016 witnessed the global markets plunging due to new fears that growth is slowing in China. The global economic conditions for 2016 appear to be heading towards a bumpy start based on the release of fourth quarter economic data for China. The data for the overall Chinese economy signaled an ominous direction for the upcoming year. The firm responsible for the release of the quarterly data, CBB International, refers to its compiled data set as the Chinese Beige Book. The Chinese Beige Book is a survey of over 2,100 firms in China. As a result of globalization and the interconnectedness of global economies, the future does not bode well for the global markets in the year ahead as the second largest economy begins to slow down.
The Beige Book
Despite the Chinese government’s optimistic signals of stabilization after a tumultuous year for its economy, the Chinese Beige Book demonstrated that revenue, volume, output, profits, capital expenditure, and debt were enervated relative to the previous quarters for all industries. The Chinese Beige Book is fashioned after the economic survey that was assembled by the Federal Reserve on the US economy in 1985. The data for the Chinese Beige Book was first published in 2012. The Chinese Beige Book is a somewhat clear peek into the opaque Chinese economy. The compiled survey is one of the key tools that investors use in order to gain a better understanding of the economic trajectory. China lacks the encompassing economic data that is typically available for developed nations. These types of surveys increase in importance as China begins to transitions into a service and consumption economy and away from manufacturing.
[via Europe’s World]
Declining profits
What may cause apprehension for the global economy is the data pertaining to profits, which is at the lowest levels ever recorded. The manufacturing and services industry was hit especially hard. The overall implication of this information is that while Beijing and the state media rushed to show that the government intervention earlier this year worked, the declaration of success might have been premature. The currency manipulation coupled with the several interest rate cuts since 2014, have failed to yield the desired stability the Chinese government was hoping for. The main dilemma facing President Xi’s government is finding the best means to maintain the planned 6.5% economic growth with short-term government intervention and long term remedies that will avoid eroding the middle class. Financial markets have already been startled by the continuing devaluation of the Chinese Yuan, also known as Reminbi.
Economic slowdown?
The more fearful aspect of the Chinese Beige Book data is the dilapidation of certain factors of the Chinese economy which were previously assumed to be its strengths, such as the inflation rate and the labour market. As the global market enters what seems to be a period of harmful deflation, Chinese firms appear to be experiencing the injurious effect firsthand as indicated by the survey. As a result, firms are reticent to hire more people as prices continue to fall, thus further weakening the labour market. As the vicious cycle begins to ensnare the Chinese economy, Beijing will feel the gravity of the situation to ramp up its monetary policy.
The credibility of the Chinese government is at stake, if these fissures of economic weakness continue to persist and slow down the Chinese economy further, the long held claim of the Chinese government in feeding its entire population will begin to falter. The Chinese Beige Book has already foreshadowed a negative start to the second largest economy for the New Year. The Chinese government is at a pivotal stage in its economic experiment that started with Deng Xiaoping. Further government intervention will only worsen an already dire situation, rather economic reform is needed if China desires to retain the growth it has experienced for the last few decades.
