20180911-招银国际-Economic_Perspectives__Gone_with_the_Wind-The_Decline_of_Chinese_Private_Sector_7页_782kb

Economic Perspectives Summary

Core Content

This document discusses the decline of the Chinese private sector and the issues with official economic data, particularly focusing on the survivorship bias in the National Bureau of Statistics (NBS) data. It highlights the shift in economic power from private to state-owned enterprises (SOEs) and the impact of supply-side reforms on the private sector.

Main Points

• Reform and Opening-Up: China's reform and opening-up policies introduced in 1978 have transformed the economy from a planned system to a market-based one. However, the reform process is still ongoing, and the relationship between market and government, private and public sectors remains a critical debate.

• Survivorship Bias in NBS Data: The NBS data on industrial enterprises above a certain size (annual income of over RMB 20 million) has shown a significant divergence between two calculation methods: the annual YoY growth rate and the cumulative YoY change rate. This discrepancy is attributed to survivorship bias, where only surviving companies are included in the data, leading to an overly optimistic view of the economy.

• Impact of Supply-Side Reforms: Since 2016, supply-side reforms have led to the elimination of overcapacity and enhanced environmental inspections, resulting in the disappearance of over 11,000 enterprises in 11 affected industries. This has had a major impact on the private sector, with steel and coal enterprises decreasing by over 50% and 30%, respectively.

• Private Sector Struggles: Despite the decline in the number of private enterprises, those that have survived are increasing their debt levels, leading to higher interest expenses and slower revenue growth. The debt-asset ratio for private companies has risen from 52.2% to 55.6%, indicating increased financial leverage and liquidity risks.

• "Death Cross" Phenomenon: The industrial value-added growth of private enterprises has declined significantly since 2016, while SOEs have experienced a sharp increase. This has led to the "death cross", where the growth rate of SOEs exceeds that of private enterprises, symbolizing the decline of the private sector.

• Economic Implications: The disappearance of private companies and the survivorship bias in data suggest a weakening private sector and a shift in economic power to SOEs. This has serious macroeconomic implications, as the private sector is a key driver of economic growth and innovation.

Key Information

• Survivorship Bias: The NBS data only includes companies that have survived, leading to overly optimistic growth figures and ignoring the failures of many private enterprises.

• Supply-Side Reforms: These reforms have targeted overcapacity and environmental issues, resulting in a dramatic reduction in the number of enterprises in 11 industries.

• Private Sector Challenges: Private enterprises are increasing their debt, struggling with liquidity, and experiencing slower revenue growth, indicating unprecedented difficulties.

• SOEs vs. Private Enterprises: SOEs have deleveraged and improved their financial health, while private enterprises have worsened their financial conditions, creating a disparity in economic performance.

• Economic Shift: The decline of the private sector and the resurgence of SOEs signal a shift in the economic structure of China, raising concerns about economic dynamism and innovation.

Figures and Data

• Figure 1: Shows the divergence in growth rates between the NBS method and the cumulative method for main business income.
• Figure 2: Highlights the divergence in profit growth between the two methods.
• Figure 3: Illustrates the decline in the number of enterprises in supply-side reform-related sectors since 2016.
• Figure 4 & 5: Demonstrate the insignificant divergence in SOEs and the significant divergence in private enterprises.
• Figure 6: Compares the total profit and private enterprise profit changes, showing a larger drop in private sector profits.
• Figure 7: Displays the increase in the debt-asset ratio of private companies.
• Figure 8: Shows the increase in interest expenses compared to income growth.
• Figure 9: Illustrates the longer average collection period for private companies.
• Figure 10: Depicts the "death cross" where SOE value-added growth surpasses private sector growth.

Analyst and Disclaimer

• Analyst: Edward Ding, Chief Economist at CMB International Securities Limited.
• Disclosures: The report is not investment advice and contains risks. It is intended for institutional investors and not for public distribution without consent.

CMBIS Ratings

• BUY: Potential return of over 15% over 12 months.
• HOLD: Potential return of +15% to -10% over 12 months.
• SELL: Potential loss of over 10% over 12 months.
• NOT RATED: No rating provided.

Important Notes

• No Liability: CMBIS is not liable for any losses incurred from relying on the report.
• No Guarantee: The information is not guaranteed for accuracy or completeness.
• Confidentiality: The report is for intended recipients only and not for reproduction or distribution without consent.

Conclusion

The Chinese private sector is facing unprecedented challenges and declining performance, while SOEs are gaining strength. The survivorship bias in NBS data may be masking the real economic difficulties, and the "death cross" indicates a shift in economic power. The private sector's struggles with debt, liquidity, and revenue growth suggest a need for deeper economic reform and attention to market dynamics.