China’s economy is deteriorating and risks heading for a much weaker 2019 as plentiful borrowing by state and private firms is failing to boost growth, according to the China Beige Book.

Borrowing was strong for a third consecutive quarter in the final three months, contradicting the mainstream view that risk-averse lenders want nothing to do with capital-starved firms, according to CBB International, which publishes the report. State-owned and large companies borrowed more often but private firms and small- and medium-size enterprises continued to borrow at elevated levels and loan rejection rates remained close to an all-time low, it said.

“The problem isn’t lack of borrowing, it’s that plentiful borrowing isn’t boosting growth,” said CBB, which collects anecdotal accounts similar to those in the Federal Reserve’s Beige Book. “CBB numbers show firms borrowing already, yet not investing. They are paying bills or otherwise cushioning cash flow problems while economic growth continues to slow.”

Policy makers have launched an unprecedented push to cajole banks into lending more to non-state companies, a campaign President Xi Jinping’s endorsed by pledging his “unwavering” support for the private sector. That effort indicates that policy makers see an urgent need to squeeze more efficiency out of an economy on track to expand this year at the slowest pace in almost three decades. Private companies generate 60 percent of the nation’s output and 90 percent of new jobs, according to the government.

Policy makers will step up support for the struggling private sector in 2019, with the State Council on Monday announcing a series of measures. The central bank will improve policies on targeted reserve-requirement ratio cuts and inclusive finance to further support private firms, and there will also be more tax cuts and faster review of private companies’ IPOs and refinancing applications.

Revenue and profit growth were both at their worst since the first three months of 2017, CBB’s survey found. No sector saw revenue growth accelerate in the final three months compared to the June-to-September period, and only real estate saw improved margins.

Manufacturers continued to be buffeted by the trade war with the U.S., and CBB data showed export-order growth descending into the teens in three regions in the quarter. The share of firms with rising orders in Guangdong province in southern China collapsed to 18 percent in the final three months from 65 percent earlier in the year, although some of that reflected the earlier front-loading of shipments, the report said.

Services and retailing followed manufacturing’s sluggish pace with both recording double-digit drops in profit growth. Sales revenue in services also faded sharply, with retail not far behind, the report said. Overall weakness hit the jobs market, too, with hiring falling for the first time since early 2016 compared with the previous three months and a year earlier, said the report.

Property held up better than the rest of the economy with profits improving and revenues stable from the previous quarter even as cash flow continued to deteriorate, CBB said. There was weakness in the smallest cities covered by the survey where there were double-digit drops in earnings and margins from both the previous quarter and a year earlier, CBB said.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Sharon Chen

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