China’s industrial sector is facing a crisis of confidence. So far, Beijing’s solutions haven’t been enough to shore it up.
In response to streams of gloomy data — from retail sales and industrial profits to layoffs — officials have vowed billions of yuan in support for railway infrastructure investment, employment incentives, tax cuts and loan disbursements. China watchers are now forecasting a deeper slowdown and have put the big-spending Chinese consumer on life support.
While that’s helped boost construction machinery makers and railway companies, as we wrote recently, a vast swath of the manufacturing sector is still struggling. New orders are down, receivables payback time is rising and inventory is piling up. For some firms, capacity is at 40 percent to 50 percent.
Meanwhile, economy-wide lending data on Tuesday showed outstanding credit continued to grow at its slowest pace in a decade. Earlier this week, a survey of 2,500 small and medium-size companies remained in contraction territory in the last three months of 2018, a government report showed. Tax cuts have amounted to little benefit, according to one private chemical manufacturer in southern China.
Anecdotally, too, uncertainty is high. All of this, no doubt, is compounded by trade tensions with the US.
In theory, opening the taps should revive spirits. In reality, the beneficiaries are still limited to state-backed companies in specific sectors. That means the majority of privately owned enterprises, with historically weak access to credit, are out of luck. And these are the ones that need it most: The bulk of the companies that defaulted in the four years through December 2018 weren’t state-backed, according to Moody’s Investors Service.
In fact, loss-making private enterprises have only increased as the total number of such firms stopped growing. Meanwhile, centrally controlled firms this week reported record high combined revenues and profits for 2018. Will re-lending resurrect the confidence to do business? That might help pay off interest, but it’s unlikely to inspire investment in operations.
We can see this shaken confidence playing out. Manufacturers are now parking cash in industrial land, which is typically cheaper than residential and commercial lots. While that’s contributed to an uptick in fixed-asset investment, it essentially amounts to a deposit. Firms are also holding back purchases of equipment and machinery, a shorter-term gauge of future outlays. Bernstein Research’s Jay Huang warned that smaller manufacturers were aggressively cutting costs (and employees) at the end of last year, which could mean dismal fourth-quarter results.
Part of the problem is that this has happened before with uninspiring results. China’s 4 trillion yuan ($590 billion) stimulus in 2008 also cut taxes (including reforms to value-added tax), loosened credit and boosted infrastructure spending. To its credit, Beijing thwarted the sharp economic contraction that the rest of the world eventually faced. It also created a dark underbelly of debt at the root of the current slowdown and pushed private firms further to the margins. Despite the stimulus, a quarter of the auto industry didn’t reach half its annual sales targets that year.
Meanwhile, all the infrastructure spending went into highway and railway deals that still don’t make money. Income from highways couldn’t cover interest and principal payments on borrowing used to build them last year. That pushed debt in the road system up almost 9 percent to 5.3 trillion yuan, according to Rhodium Group analysis. Beijing just announced more of these projects.
It’s little wonder, then, that China’s private companies and manufacturers have been unresponsive to the latest drip feed of stimulus. Once bitten, twice shy.