China’s third-quarter GDP-growth figure of 6.7%, announced Wednesday, would have us believe that the country successfully rode out the storms of 2015 and early 2016. Yet this headline number gives a misleading picture of the real economy. Our firm’s China Beige Book (CBB), a comprehensive survey of 3,100 companies, suggests that the country’s growth became less sustainable in the third quarter. Compared to official figures, the CBB found only slightly weaker third-quarter revenue-growth numbers among firms nationwide. But those same firms reported weaker profits and shockingly poor cash flow. These metrics must improve, otherwise headline stability-real or imagined-cannot last. Many investors might also be disturbed by headline stability if they knew what it rested on. Growth was driven in the third quarter by the old economy-manufacturing, property and commodities-while the much-heralded new economy of services and retail did worse as compared to both the previous quarter as well as last year. The retail sector has been especially illuminating. Considering the strong recent earnings from headliners such as Alibaba, it may seem startling that retail could have had a poor third quarter. But those retailers that primarily or exclusively sell online are cannibalizing growth from their bricks-and-mortar rivals. Traditional retailers saw no revenue growth at all. Yet they were the ones that boosted third-quarter capital expenditure, wasting money fruitlessly to maintain market share. This is a reasonable evolution for retail, but it hardly portrays the inexorable rise of the Chinese consumer. Retail’s maturation process includes pain. The unwanted old-over-new dynamic was also evident in profits. Coal boosted profits most, followed by commercial construction. More broadly, manufacturing and property led while retail saw the biggest stumble. Services-sector profits also weakened, following a banner second quarter. It’s hard to imagine an outcome less in line with the constant proclamations of successful restructuring. Even worse, cash flow deteriorated nationwide in the third quarter. The decline was moderate compared to the second quarter and sharp compared to a year earlier. Faring worst was the sector that has global equities markets hypnotized: property. Property revenues did surge in the third quarter-another welcome headline. But both receivables and payables fell off a cliff, with cash flow sliding into the red in each of our five subsectors. It’s no surprise, then, that a supposedly prosperous quarter saw a spree of new borrowing. If the economy is being propped up by a textbook property bubble, deteriorating cash flow is the red flag. Concerns about fading private investment have been somewhat overblown and will ease shortly, as CBB data already show and official data will soon. With profits slipping, ramped-up investment was financed by more borrowing. This might not be disturbing were it confined to surging manufacturing firms, for example. But it is property firms and struggling bricks-and-mortar retailers that are borrowing and investing more. The initial investment recovery remains an unhealthy one. There were several areas of strength in the third quarter. The recovery in hiring continued, offering little reason at present for policy makers to try and stimulate the economy before next year’s Communist Party Congress. Stronger prices were also evident across the board, in sales, wages and input costs. The specter of China exporting deflation has receded, reducing the pressure at the U.S. Federal Reserve and other international policy bodies. The risks from these welcome developments, the overemphasis on headline stability and the overlooked deteriorating financials can be encapsulated in one word: complacency. One group of investors checks the headlines and assumes China is fine. Another set believes the Party won’t let the economy deteriorate before the politically sensitive congress next fall, relying on the central government to have the fiscal firepower to ensure a somewhat happy 2017. Those are dubious bets. While official statistics will gleam no matter what actually happens over the next year, deteriorating cash flow, narrowing profits, an unwieldy property bubble and unsteady restructuring indicate that stability is fragile. The third quarter makes clear there are going to be problems in the next year.