Despite Financing Trouble, High Costs and Low Prices, Chinese SMEs Remain Optimistic for Next Six Months

LONDON, June 8, 2016 /PRNewswire/ --

- According to data from CKGSB Business Conditions Index for May 2016

The CKGSB Business Conditions Index (BCI) registered 58.2 in May, less than April's overall index of 59.3. Corporate sales dropped from 73.1 to 71.8, while the sub-indices for financing and inventory levels both dropped below the confidence threshold of 50, moving from 51.2 to 47.5 and from 50.0 to 49.4, respectively. Despite this, the majority of firms sampled view the next six months with some optimism.

Offering an analysis on the data, Professor Li Wei said, "China's corporate sector needs to reduce leverage, while Chinese banks need time to repair their balance sheets. All of this means that China's 'new normal' will result in slower growth and some painful restructuring. We all need to adjust to this new reality."

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The CKGSB BCI comprises four sub-indices for corporate sales, corporate profits, corporate financing environment and inventory levels. Of these four sub-indices, only the corporate profits index rose this month, up to 62.3 from 61.5.

The CKGSB BCI also forecasts costs, prices, investment and recruitment demand for the next six months. Labor costs and overall costs expectations rose somewhat in May, both recording indices of over 80, with labor costs rising from 79.2 to 84.3 and overall costs rising from 77.8 to 82.3. Prices of consumer and producer goods slipped, however, falling to 47.3 (from 51.5) and 40.6 (from 42.6), respectively, below the confidence threshold. The data shows that Chinese firms are experiencing financing trouble: high costs grow apace but prices keep contracting.

However, in the face of adversity, our sample firms continue to recruit and invest. No matter the macroeconomic conditions over the past five years of the BCI (which launched in 2011), the Chinese firms sampled have prioritized corporate investment and recruitment, proving a conundrum for observers. This month, the index for corporate investment remained at a relatively high level, edging down from 68.0 in April to 67.6 in May. Meanwhile, recruitment demand went up to 69.9 from 67.1

Most sample companies in the BCI are leading Chinese private SMEs and so their competitiveness is consistently higher than the average (50 points) for their respective industries. Each month, respondents are asked to indicate whether their firm is more, the same, or less competitive than the industry average. The higher the figure, the more competitive our sample firms are in their respective industries. In May 2016, the competitiveness index registered at 71.7, down slightly from 72.8.

Analysis by Li Wei, CKGSB Professor of Economics  

The BCI tracks closely monetary and credit conditions as indicated by the monthly release of M2, a measure of money supply that includes cash and checking deposits, as well as savings deposits, money market mutual funds and other time deposits. That the BCI tracks credit expansion in China should not be surprising. The growth of the Chinese economy has been driven in the last three decades by massive investments, which have been largely financed by bank loans.  

In addition to tracking the cyclical fluctuations of the Chinese economy, the monthly CKGSB BCI releases also contain additional indices that allow analysts to infer structural issues facing the Chinese economy. Our data have shown consistently the following stylized facts since 2011:

• Chinese firms have not been able to pass cost increases onto either downstream firms or consumers.
• Producer prices have often been falling since 2012, and the pace appears to have accelerated since the end of 2014.
• Chinese firms have consistently been bullish in planning additional capital expenditure and in hiring.

The first two stylized facts are consistent with the view that there is overcapacity in many of China's industrial and service sectors. The third stylized fact suggests that either Chinese business owners and operators are highly enterprising - as they should have been given the extraordinarily high economic growth that they have brought about - or that there is something rather more worrisome. This alternative interpretation, which I find more convincing, is that Chinese managers are betting that the government will act aggressively using expansionary monetary, fiscal and industrial policies to boost economic growth whenever the economy faces strong head winds.

Overcapacity is a worldwide problem. In countries where infrastructure investment has lagged behind, there is indeed a case to be made that investments there may be a positive on a global level. Here we are looking at the US and much of Europe. China can also benefit from additional investments in some areas. But China's corporate sector needs to reduce leverage, while Chinese banks need time to repair their balance sheets. All of this means that China's 'new normal' will result in slower growth and some painful restructuring. We all need to adjust to this new reality.

CKGSB BCI Introduction 

In June 2011, the CKGSB Case Center and the Center for Economic Research initiated a project, under the direction of Professor Li Wei, to gauge the business sentiment of executives about the macro-economic environment in China. The CKGSB Business Conditions Index is a set of forward-looking, diffusion indices. The survey asks senior executives of companies whether their main products are for consumers or non-consumers, and then asks how they think product prices will change in the next six months. The index takes 50 as its threshold, so an index value above 50 means that the variable that the index measures is expected to increase, while an index value below 50 means that the variable is expected to fall.

About Cheung Kong Graduate School of Business 

Established in Beijing in November 2002 with support from the Li Ka Shing Foundation, CKGSB is China's first faculty-governed and independent business school. CKGSB boasts more than 40 full-time professors, who have earned their PhDs or held tenured faculty positions at leading schools such as Harvard, Wharton and Stanford. Their research has provided the basis for nearly 400 case studies of both China-specific and global issues. CKGSB also stands apart for its unmatched alumni network. More than half of CKGSB's 9,000+ alumni are at the CEO or Chairman level and, together, their companies accounted for one sixth of China's GDP in 2015. Headquartered in Beijing, CKGSB is also located in Shanghai, Shenzhen, New York, Hong Kong and London.

For more information, please visit http://english.ckgsb.edu.cn