HONG KONG (Reuters Breakingviews) - China bears and bulls can pick their data in the Year of the Pig. Stock markets are charging; bonds defaulting. Lunar New Year holiday spending was weak, but January exports boomed. State-owned companies and contradictory industrial and monetary policies are muddying traditional performance measures. They betray an economy going in two directions at once.
Economic distortions introduced by the festival, which falls in January or February depending on the year, make it dangerous to extrapolate trends. But 2019 was extreme even by Chinese standards.
The “Golden Week” holiday takes an early snapshot of consumer confidence. It looked ugly: retail sales cooled to 8.5 percent, the first instance of single-digit growth since 2005, says Nomura. Combined with anemic inflation and falling imports, demand looked bleak.
And yet luxury group Hermes reported sterling revenue growth in China in the fourth quarter, as did rival LVMH. Another economic bellwether, Yum China, served up more fried chicken than expected, with same-store sales rising 2 percent. The benchmark CSI300 index is up 14 percent year-to-date. The critical real estate market looks stable enough, and trade data was a happy surprise.
Beijing relies on tools designed to track the performance of a simpler, investment-driven economy. They are poor at capturing nuance, and the task is complicated by the intrusion of state-owned companies into non-strategic sectors, and the fact that retail statistics capture government purchases. Regional disparities have widened in recent years too, distorting national averages.
Monetary policy is another factor. Stimulus is supposed to target productive companies without fuelling asset bubbles. This helps explain why bond defaults are up even as rates ease and lending revives. Yet most Chinese private firms, lacking easy access to loans and fixed-income markets, are accustomed to making do with minimal leverage. Credit is neither their biggest problem nor an easy solution to their ills.
As for companies, revenue growth varies widely depending on the product line, the target customer – and the presence or absence of state subsidies. The withdrawal of tax incentives, for example, is largely to blame for correcting auto sales. In short, the People’s Republic is no longer generating an economic tide capable of lifting, or sinking, all boats. Is the economy on its way up, or down? Yes.
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