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China Economy Suffered From High Borrowing, Low Cash Flow, And Trade War In Q4: Report

Neer Varshney

China's economic growth numbers for the fourth quarter are expected to be below the belt, as local companies continued to face a host of challenges, according to a report by research firm China Beige Book.

Overwhelming Borrowing, Underwhelming Cash Flows

According to the research reported by CNBC on Thursday, the manufacturing and services sectors saw "muted profits," in spite of posting revenue improvement.

The Chinese firms saw falling demand as the number of new orders created on their platform continue to deteriorate, the research said on the basis of a survey of more than 3,300 local businesses.

The cash flows continued to deteriorate, even by "Chinese standards," the CNBC report of the research said, "to the worst levels" ever recorded by China Beige Book.

The corporate borrowing in the quarter also increased significantly, according to the research, with "shadow financing," making inroads into the economy again.

The loans from the informal sector, which is largely unregulated, increased to nearly 40% in Q4, compared to 29% in the same quarter in 2013, according to the research.

"For the first time since 2012 we saw each of our four core sectors—Manufacturing, Retail, Services, and Property—report over 30% of firms borrowing," the research said, according to CNBC.

Trade War Impact Could Continue In 2020

Noting the impact of the trade war with the U.S. on China's economic activity, China Beige Book said that the country's manufacturing sector was "surprisingly solid" over the quarter.

The research said that the U.S. tariffs lowered Chinese exports in Q4, but the manufacturing sector in the country continued to post profits.

The profits could be hiding the problem of over-production as a result of the reduced exports, which is being born by retailers, according to the report.

It noted that the inventory accumulation slowed in both Q3 and Q4, meaning that the retailers are hoarding supplies, which could, in turn, affect the manufacturing sector in the coming year.

With the U.S. and China set to sign a trade deal in early January, the report said that things aren't likely to "get materially worse over the next year" for China.

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