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An independent survey of more than 2,000 companies suggests China’s industrial sector suffered yet another round of contraction in the fourth quarter, even as producer price inflation rebounded and output growth returned.

The Cheung Kong Graduate School of Business’s quarterly Report on China’s Industrial Economy indicated that industrial production saw its first expansion in six quarters in Q4 2016, driven mainly by consumer goods. Prices charged to customers also rose substantially during the period thanks to growing labour and raw materials costs, with more than a quarter of firms reporting product price inflation that exceeded 10 per cent.

However, the report’s headline Business Sentiment Index came in at 46 for a fourth straight quarter – below a 50-point mark delineating growth from contraction. Despite official media reports of progress in tackling chronic oversupply last year, the survey also found the prevalence and severity of industrial overcapacity remained at historic highs.

Gan Jie, the professor at the business school who heads up the survey, said the central focus of China’s industrial economy in 2017 “will still be the reduction of overcapacity, while inflation and cost rises should be carefully watched. Against this background of overcapacity, it remains our view that a loosening of monetary policy would not revive the industrial economy.”

Employment appeared to shrink at a slower pace in the fourth quarter, but persisted throughout the whole of 2016, during which an estimated total of 5.5m industrial jobs were lost.

Petroleum processing and non-metallic minerals products were among the sectors that suffered from the worst overcapacity in Q4 – though price rises for iron, steel and coal helped pull those segments off the bottom-five list.

In line with official data pointing to sustained, outsize investment by government firms last year, the survey found that state-owned enterprises performed better than private companies. Only 9 per cent of companies made fixed asset investments in the December quarter, with just 2 per cent investing in expansion and just 0.8 per cent saying they planned to make investments during the next quarter.

In a potential challenge for Beijing’s drive to encourage growth in high-tech manufacturing, research and development spending also declined last quarter, with 80 per cent of firms making no R&D investment during the period.

Copyright The Financial Times Limited 2017. All rights reserved.
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