China’s economic growth likely slipped in the third quarter but was still in far better shape than last year, a private survey showed on Wednesday, while adding that major risks are looming for 2018.

Profits at Chinese firms are much healthier and hiring remains robust, but a five-quarter boom in commodities which has stoked growth has begun to reverse, according to the quarterly survey of thousands of Chinese firms by China Beige Book International (CBB).

“While growth eased almost across the board quarter-on-quarter, the economy boasts a number of success stories,” CBB said in its report.

“The worry is not how the economy is faring now, but where it is headed. Beneath substantial accomplishments lies a potentially darker story for 2018.”

While the survey painted a picture of still solid economic growth, it pointed to a number of major risks including a continued over-reliance on cheap, easy credit and “old” growth drivers such as manufacturing and property.

China’s commodity prices have soared this year thanks to a government-led construction boom and official announcements of capacity cuts, which have revived the fortunes of its long-ailing “smokestack” industries such as steel.

But CBB said China’s capacity cuts are largely a myth, with firms in its survey reporting that capacity and output are still on the rise.

“It was demand and hot money inflows that kept prices rising in commodities, not capacity cuts as many analysts would have you believe. Neither trend was sustainable and now demand has clearly sputtered.”

Chinese iron ore futures had tumbled 22 percent as of Tuesday after hitting a high of over 600 yuan a tonne in August, reflecting oversupply concerns as global miners ramp up output while near-term steel demand in China looks to be at risk.

CBB also cautioned about the prevailing market view that China’s growth has so far proved largely resilient to government efforts to clamp down on riskier forms of lending and slow a rapid increase in debt.

“The mistake is that deleveraging hasn’t gotten off the ground,” it said, adding that borrowing by Chinese companies was the second-highest in four years in the third quarter while lending rates fell after rising in the previous quarter.

“It is a serious error to believe the current, impressive level of corporate performance is occurring despite true deleveraging,” CBB said.

“If 2018 sees actual tightening, it will be far more traumatic to firms than most analysts realize.”

S&P downgraded China’s sovereign credit rating last week, saying the government’s campaign to reduce debt risks is not working as quickly as expected and credit growth is still too fast.

REBALANCING MAY BE SLOWER, MORE UNEVEN

The CBB report also pointed to challenges in Beijing’s long-standing goal of rebalancing the economy to make it more reliant on consumption and less on traditional growth engines such as manufacturing.

Manufacturing has outperformed, and has been the healthiest part of the economy for the past year, CBB said, with solid domestic orders and capital expenditure figures trailing only the property sector.

But the services and retail sectors both slowed more than manufacturing in the third quarter, the survey showed, without giving more details.

“The results certainly aren’t terrible, but they hardly support the notion that services and retail are primed to lead the next decade of growth.”

China will report September data and third-quarter growth figures in mid-October. First-half GDP growth accelerated at a forecast-beating pace of 6.9 percent.
Source: Reuters (Reporting by Elias Glenn; Editing by Kim Coghill)