China’s Economy Continues to Weaken

The manufacturing sector–thanks to the U.S.-China trade war–continues to slow China’s economy. But the real problem may be an underperformance in the services sector that makes it impossible for that sector to pick up the slack.

The end result is that the third quarter looks to be the weakest of the year, according to the China Beige Book, an independent in-country data gathering company that conducts interviews with thousands of firms across all of China’s regions, sectors, and 34 discrete industries.

No doubt that the current weakness in the economy is primarily due to manufacturing. But a drop in exports is only part of the problem. The rate of increase in prices has slowed “considerably” with prices at the factory door falling in July and August. That will have hurt company profits.

Which is likely to be why borrowing surged in the period. Shadow banking posted the biggest quarterly increase since the Beige Book began in 2010. Bond issuance rose for a fifth quarter and lending also increased.  More than 30% of manufacturing firms were borrowing in the quarter suggesting that “the sector as a whole is in clear distress or a large proportion of firms should be failing,” according the China Beige Book.