Current market perceptions of China are "thoroughly divorced" from the reality on the ground, according to the latest China Beige Book (CCB) survey, which has found that while the economy slowed in the third quarter, there are no signs of an impending growth collapse.
"In the aftermath of the stock market collapse and a surprise currency action in August, global sentiment on China has veered sharply bearish—too bearish," Leland Miller, president of CBB said.
"While we have long cautioned clients against relying on rosy official views of the Chinese economy, we believe sentiment has swung substantially too far in the opposite direction," he said.
The quarterly private sector survey, which resembles the U.S. Federal Reserve's Beige Book, is based on interviews with over 2,100 companies across the country in a variety of sectors, ranging from retail to real estate.
Corporate revenue growth, although weaker than the second quarter, actually improved over the first quarter, and was stable in on-year terms, according to CBB.
"The slowdown was concentrated in the public sector, where revenue growth slowed moderately, while the private sector saw only a slight downtick and from a higher rate of growth,' Miller said.
While manufacturing saw its weakest performance in two years, as indicated by recent purchasing managers' index (PMI) surveys, other sectors buoyed the economy.
The services sector was a bright spot, which saw improvement both on quarter and on year in revenues, pricing, volumes, and capital expenditure, according to CBB. Transport also saw modest revenue gains both on-quarter and on-year, while the mining sector enjoyed a rare bounce back, with on-quarter revenue gains indicating demand strength in parts of the economy.
Retail and property saw on-quarter weakening, but those results were stable and improved, respectively, on-year.
Deflation nation?
Concerns over deflation in China, fueled by the plummeting producer price index (PPI), are overblown, according to CBB.
"Official inflation gauges are being misrepresented. A common story is that the CPI [consumer price index] reflects wages, and the PPI sales prices, so the recent divergence of the two is eviscerating companies' bottom lines. This is inaccurate," Miller said.
"For now, the CPI is being driven by food, not wages, while the PPI is being driven by imported commodities, not domestic oversupply," he said.
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China's PPI – a gauge of factory gate prices - fell 5.9 percent, marking the 42nd consecutive month of declines, while CPI rose 2 percent in August from a year earlier.
"A shrinking labor force means long-term pressure for higher wages, and it is almost impossible for commodities prices to continue to fall as steeply as they have. Federal Reserve take note: true deflation in China remains unlikely," Miller added.
Is monetary stimulus futile?
While investors have been calling on the People's Bank of China to further loosen monetary conditions to bolster the flagging economy, Miller says lower interest rates are unlikely to do the trick.
"Our data, continuing through Q3, show that interest rates have dropped considerably, at banks and shadow financials as well as in terms of bond yields," he said.
"Yet the result was still a downtick in the share of firms that accessed capital—as well as those that sought to do so—tying the lowest levels we have recorded in our survey."
While this leaves the door open for fiscal support, Miller says China's track record with fiscal stimulus is questionable.
"The 2009 binge, for example, was carried out through bank loans and corporate investment, not net government spending increases," he said. "While China is not without policy tools, we stand in uncharted territory."