China’s Improving Economic Data Masks Deeper Problems

HONG KONG — China’s factories are beginning to hum again. Its consumers are opening their wallets. Its trade tensions with the United States are easing.

On paper, the world’s second-largest economy looks as if it may be shrugging off its worst slowdown in nearly three decades. China reported economic growth figures on Friday that suggest its economy is stabilizing after a year of consecutive quarterly declines. Wall Street has already been celebrating.

Dig a little deeper, however, and difficult problems quickly become apparent. China’s economy, a major engine of global growth, still faces some of its biggest challenges since it began opening up to the outside world four decades ago.

Some of China’s economic figures look better in part because they were notably weak a year earlier. The initial trade deal signed on Wednesday in Washington still leaves untouched American tariffs on hundreds of billions of dollars’ worth of Chinese-made goods. Perhaps most important, the Chinese economy is still struggling to kick an addiction to borrowing that has loaded the country with trillions of dollars in debt.

“Right now, we are looking at the glass half full. The markets are extremely optimistic, and they are inclined to see the positive side,” said Hao Zhou, a senior economist at Commerzbank.

He added, “We have to keep in mind that the glass is also half empty.”

China on Friday reported annual growth of 6.1 percent, the slowest pace in 29 years. Economists, however, are likely to pay closer attention to figures that indicate that the economy stabilized in the final three months of last year. The figures show that the Chinese economy grew 6 percent in the fourth quarter, compared with the same period a year earlier, matching the pace of the July-to-September period.

In the wake of the partial trade truce, Friday’s economic figures paint a more positive picture for China’s leaders. Strong economic performance helps the Communist Party keep an iron grip on China’s political system. Big growth numbers have become more difficult to reach as the economy matures — the once-poor country is now the world’s largest manufacturer and accounts for more than $14 trillion in annual output.

But the lift from the trade pact is likely to be small. The deal preserves the bulk of President Trump’s tariffs on $360 billion a year in China-made goods, which will keep pressure on Chinese factories over the long term. In the short term, the trade war’s impact on the Chinese economy has been smaller than expected by many, chipping about half of a percentage point off China’s 2019 gross domestic product, S&P Global, the research firm, estimated.

“The trade deal takes the tail risk off the table,” said Shaun Roache, chief economist at S&P Global.

“This is not going to be enough to change the underlying dynamic in China,” he said.

The economy’s biggest pressure point may be self-imposed by Beijing. Years of driving growth by lending and spending has loaded Chinese companies and local governments with huge amounts of debt. China has taken steps to curb excess lending and let careless borrowers fail, hurting growth in the short term.

China’s leaders appear to be open to taking that risk. The state news media has signaled a willingness for growth this year to fall below 6 percent for the first time since 1990. Economists have been ratcheting down their own growth estimates. Mr. Zhou, of Commerzbank, estimates growth will fall to 5.8 percent this year. S&P estimates growth will fall to 5.7 percent.

The lowered expectations reflect other pressing headwinds. One of the biggest is the deteriorating health of China’s corporate sector. Businesses across the country, from toymakers to start-ups to carmakers, are strapped for cash and struggling to pay their bills.

In the last three months of 2019, the number of late payments by companies to their clients, employees and creditors reached a record high, according to China Beige Book, the economic consulting firm.

Some sectors were hit particularly hard. In China’s auto industry, the world’s largest, sales dropped more than 8 percent last year compared with 2018, according to a state-owned industry association. The property industry, a key economic driver in a country where households park a great deal of their wealth in housing, is also showing signs of struggle.

Short on cash in 2019, more and more Chinese companies issued i.o.u.s known as commercial acceptance bills instead of paying their bills in cash. By midyear, there were some $200 billion of these i.o.u.s circulating.

A brisk trade in the i.o.u.s has developed. Some companies paid in commercial acceptance bills sell them at a discount when they experience their own financial problems, spreading the potential risk to other parts of the economy if the issuer ultimately cannot pay up.

Other signs indicate that Chinese companies are having problems paying their bills. A record number of Chinese firms defaulted on bonds to local and foreign investors in 2019, including some high-profile companies like a giant state-run commodities firm and a conglomerate backed by the country’s most prestigious university.

Over the next two years, these companies will owe hundreds of billions of dollars to lenders and investors around the world. If they cannot pay, Chinese companies may find it getting more expensive to borrow money in the future.

China’s new restraint on lending has kept it from injecting vast amounts of money into the financial system and launching hugely expensive infrastructure projects to keep the economic gears spinning. At the same time, it is still freeing up money for companies to borrow, through steps like lowering the amount of cash from deposits that it requires China’s banks to keep in reserve for unexpected emergencies.

Those steps have not helped the economy much, which is a troubling trend, said Leland Miller, the chief executive of China Beige Book. A lot of money did make it to the 3,300 companies that his firm surveys, but their performance did not improve much.

“The fact that you aren’t seeing an ‘oomph’ is concerning,” Mr. Miller said. What’s more, he added, many of these firms are still swimming in debt.

Despite the economic red flags, some China watchers have pointed to the most recent retail and industrial output figures as potential silver linings. Value-added industrial output in November grew 6.2 percent from the previous year, according to government statistics, suggesting that factory production kicked back up at the end of the year.

This was part of a regional trend as exporters across Asia cut back production earlier in the year amid slowing global trade and worries that unsold products would sit in the warehouse. Many ran out of inventory toward the end of the year and had to ramp up production to meet new orders. In South Korea, electronics firms were particularly affected, and the data reflects a similar jump there.

Some economists said that buoyant retail numbers were boosted by a stronger-than-usual Singles Day, China’s biggest shopping day of the year, which takes place on Nov. 11. December’s retail sales were similarly strong, but many economists still were not convinced that the momentum will continue without government help.

“I would not extrapolate recovery from the fourth-quarter figures,” said Larry Hu, chief economist at the Macquarie Group.

“This growth,” he added, “is not sustainable.”

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