China is slowing down, and tariff troubles are only making this fear worse. We spoke with Shehzad Qazi, managing director at China Beige Book International, about his thoughts on China’s weakening economic conditions.

Not as Weak as We Thought

Since the spring, we’ve heard the Chinese economy is in critical condition amidst historically low investment, slowing retail sales, a slowdown in borrowing, and a potentially troubled Chinese consumer.

Qazi believes these perceptions are inaccurate. Investment spending and capital expenditures in China were not cratering last quarter—they were accelerating.  

Corporate borrowing was certainly not sliding, he added. Qazi saw credit explode to some of the highest levels seen in over half a decade. Similarly, retail posted robust performance for a second straight quarter.

“We are also seeing that the hiring situation in the labor market remained strong despite a slowdown,” Qazi said. “While conditions are weakening, they’re again not as bad as many market watchers have decided.”

Panic Borrowing Seen

Corporate borrowing and credit are expanding at the fastest pace since 2013, however, it remains to be seen whether this new credit will offset the impacts from the latest round of tariffs. Qazi asserted these tariffs are more meaningful, representing 10 percent on $100 billion worth of goods.

“Something of a panic is certainly starting to become apparent in the manufacturing sector,” Qazi said. “Of course, only time will tell whether the success of borrowing and access to cheap credit will help restore some kind of normalcy.”

In the third quarter the investment picture was weak with the profitability picture even weaker. Qazi expects manufacturing will likely continue to weaken, even if it’s only in a gradual manner.

“The real question now is, will Beijing offer some old school fire hosing as the economy continues to slow,” Qazi asked. “One of the most interesting findings from this latest quarter is the fact that borrowing is at a 5-year high, but there was virtually no interest rate response at all. … That’s because, as we continue to stress, China has a noncommercial financial system and so we did not see interest rates spike. … We do expect borrowing levels to remain elevated, and we probably won’t see much movement on borrowing costs or interest rates.”