China economy growing but harder times beckon

China’s economy continued to improve in the second quarter, with corporate profits rising and hiring up, a private survey showed, but it suggested the Asian giant may have to brace itself for tougher times ahead even though firms have been able to weather a tighter financing environment.

The quarterly survey of thousands of Chinese firms by China Beige Book International (CBB) showed yesterday that while the property sector slowed, manufacturing improved further and the retail and service industries bounced back after a difficult first quarter.

That reinforced a flurry of recent data and policymakers’ comments that indicated the authorities were working to curb financial risks and keep the economy on an even keel heading into a key political meeting this year. The survey showed surprisingly strong performance in the commodities sector despite some price weakness in the second quarter, with the aluminium sector particularly strong.

Yet signs of stress in the corporate sector pointed to a bumpy ride for businesses. CBB said cash flow was negative for many companies and inventory levels in the second quarter was at the highest in the history of the survey.

That is in line with official data showing growth in industrial inventories picked up to over 10 per cent in April, sparking worries of weak demand. CBB said there are signs that tougher times could be ahead for Chinese companies during a period of deleveraging and rising interest rates.

“It remains true that either rates have to come plunging back down, as the (state planner) recently called for, or the present level of corporate activity is headed for a cliff,” CBB said in its report.

As the government stepped up its campaign to curb debt risks and stabilise the financial sector, growth of China’s broad money supply came in at the slowest in at least two decades in May, though bank lending remained solid.

The survey showed the corporate sector started to feel the effect of tighter credit conditions in the second quarter. Borrowing was not impacted much, CBB said, likely due to positive business outlook for the next six months.