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China's economic conditions deteriorated in the fourth quarter, raising doubts over whether it is transitioning from manufacturing to services-led growth, according to a private survey from a New York-based research group.
National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International.
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The profit reading is "particularly disturbing," with the share of firms reporting profit gains slipping to the lowest level recorded, CBB president Leland Miller wrote in the report.
While retail and real estate held up reasonably well, manufacturing and services performed poorly.
The survey shows "pervasive weakness", Miller wrote.
"The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit."
After efforts including six interest-rate cuts since late 2014 failed to revive growth, policy makers are switching focus to fix problems like overcapacity on the supply side. President Xi Jinping -- seeking to keep growth at a minimum 6.5 per cent a year through 2020 -- is juggling short-term stimulus with long-term prescriptions to avoid the middle-income trap that has ensnared developing nations after bouts of rapid growth before they became wealthy.
The report was based on surveys of more than 2100 firms across China and interviews with bankers, managers and executives.
The three most high-profile regions performed the worst, with Shanghai's "dismal" showing outpacing Guangdong's and Beijing's.
The interest of firms in both borrowing and spending continues to decline, suggesting it's past time the 'stimulus mafia' rethinks its Pavlovian responses ... Reform or bust.
"More concerning than overall growth weakness was degradation of two components of the economy that were previously overlooked as sources of strength: the labour market and the impact of inflation," Miller wrote.
Given that growth in input prices and sales prices slipped to record lows while firm performance metrics fell, "it looked like firms were encountering genuinely harmful deflation", he wrote.
If labour market weakness persists, policy makers in Beijing will feel "increasing pressure" to ramp up the policy response, the report said.
The survey contrasts with official readings that have suggested the economy was stabilising this quarter. The latest reports on industrial production, retail sales and fixed-asset investment all exceeded forecasts.
Bloomberg's monthly China GDP tracker picked up to a 6.85 per cent estimated growth for November, the best reading since June.
In a worrying sign for the effectiveness of monetary easing to date, the share of companies borrowing declined to a record low.
"The interest of firms in both borrowing and spending continues to decline, suggesting it's past time the 'stimulus mafia' rethinks its Pavlovian responses," Miller wrote. "Reform or bust." Bloomberg