China growth is humming but ‘darker story’ may emerge in 2018

BEIJING: The world’s second-largest economy keeps on delivering positive surprises this year, such as a leap in industrial profits last month. That isn’t stopping worries gathering that 2018 won’t be as bright.

Industrial profits increased 24% in August from a year earlier, the most in four years, compared with the 16.5% pace a month earlier, the statistics bureau said on Wednesday.

A satellite-image gauge of manufacturing facilities showed activity was the strongest in six months, and sentiment in the steel industry is at a 12-month high. International investors are also more bullish on the Chinese outlook.

At the same time, as much of the current mood could depend on the short-term profit gains delivered by government-mandated cuts in steel and other industrial capacity, different indicators could be a better guide of things to come.

A gauge of activity at small companies edged down and an index of sales-manager sentiment weakened.

That fits with concern expressed in the China Beige Book this month that progress on reducing debt and industrial capacity is proving elusive.

President Xi Jinping has been overseeing a reassertion of control over the economy and financial system this year, in the lead-up to the twice-a-decade Communist Party leadership gathering scheduled to convene next month in Beijing.

With some track record in calling pivot points, the Beige Book report, which collects anecdotes on the economy from more than 3,000 firms, said its survey evidence rebuts some of the key perceptions about the economy’s progress.

“With the Communist Party Congress just weeks away, leadership can breathe easy,” CBB president Leland Miller and chief economist Derek Scissors said in the 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.”

CBB said in its prior report that China’s economy remained strong in the second quarter as the Communist Party sought to prevent any pain ahead of the congress. Policy support, a lack of shocks, and the looming political transition offered a best-case scenario for the economy, they said.