CHINA

Coming out ahead in the post-pandemic world, but not without risks

MEDIUM RISK for entreprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Last updated in July 2021.

Swipe to view more

GDP	USD 14722bn (World ranking 2, World Bank 2020)
Population	1402mn (World ranking 1, World Bank 2020)
Form of state	One-party state
Head of state	Xi Jinping (General Secretary of the Communist Party)
Next elections	None

Large domestic market
Improvement in macro-prudential management
External position and fiscal position (to lesser extent) are relatively solid
New growth opportunities as the country moves up the global value chain, and the services sector develops
Increasing market orientation and opening of the domestic market

High corporate debt, rising household debt
Industrial overcapacity
Strong involvement of the public sector in the economy
Continued geopolitical tensions with key countries in the region and the U.S.
Competitiveness erosion for traditional manufacturing sectors
Aging population

useful description of image if informative and not decoration only.

A solid but still uneven recovery, focus shifting to the long-term

China is a regular global outperformer, with +9.3% growth on average over the past 20 years and +7.7% over the past 10 years. In 2020, China was one of very few economies spared by a recession (+2.3%), thanks to resilient exports and a swift policy reaction that ensured a quick rebound in infrastructure investment and the real estate sector. We expect the recovery to continue and broaden across sectors, even though household confidence and spending intentions are not yet back to normal. Overall, China’s economic performance is likely to remain above the global average. Over the past few years, business insolvencies have been very volatile in the context of structural reforms in the registration framework. They remain below the 2020 levels for now.

Policy support against the Covid-19 crisis consisted of fiscal spending, tax waivers and an accommodative monetary policy that made corporate funding conditions more favorable. These actions had a quick positive impact on policy-driven industries in 2020, while the private sector and manufacturing investment have become clearer growth drivers since the beginning of 2021. With an overall solid economic recovery and with the focus turning to long-term vulnerabilities, authorities are aiming to rein in policy support. The monetary policy is being tightened in a flexible and data-dependent manner. China needs to deal with a large level of debt, amounting to nearly 300% of GDP in total (c.70% public debt, c.60% household debt and c.170% corporate debt). The external environment is supportive: external debt is generally low, FX reserves are largely sufficient, China’s export market share is higher than before the Covid-19 crisis and the current account should remain in surplus in the coming few years (c.1.5% of GDP). Risks remain nonetheless, notably regarding tensions with the US.

Structural vulnerabilities are manageable for now

Overall, indicators show that the short-term financing risk is medium. Indicators that need monitoring in the short run are in particular the fiscal deficit (especially accounting for all government levels and agencies, at c.10% of GDP) and domestic credit growth (clearly above emerging peers and particularly high in real terms due to muted inflation). We would also keep an eye on the corporate bond market, where defaults have been more numerous since Q4 2020.

In the medium run, China does not present any unbearable economic risk. The main challenge is managing the transition to a lower pace of potential growth as the economy matures by finding new drivers (innovation, private consumption etc.) and navigating vulnerabilities (debt burden, geopolitical tensions, aging population etc.). The risk of a banking crisis is limited for now in our view, but needs watching (especially smaller size banks).

Business environment: improving the rules of the game

The business environment is improving. China jumped to the 31st rank in the 2020 World Bank Doing Business survey (from 46th in the previous edition and 78th the one before). This progress reflects improvements in a wide array of subcomponents ranging from procedures for starting a business to measures to improve electricity access and get construction permits. Looking ahead, signs of further improvement are building up. Since 2018, authorities have initiated a range of policies to (i) create a more pro-private-businesses environment (tax cuts, targeted lending to private companies, etc.), (ii) facilitate trade with tariff cuts (e.g. in the automotive sector, consumer goods but also more broadly the most-favored nation rate) and (iii) accelerate the country’s opening to foreign investment (e.g. reducing barriers in the financial sector).

Trade structure by destination/origin

(% of total)

Exports	Rank	Imports
United States 17.5%	1	9.8% Taiwan
Hong Kong 10.5%	2	8.5% Japan
Japan 5.5%	3	8.4% South Korea
Vietnam 4.4%	4	6.6% United States
South Korea 4.3%	5	5.6% Australia

Trade structure by product

(% of total)

Exports	Rank	Imports
Electrical machinery, apparatus and appliances, n.e.s. 15.1%	1	23.3% Electrical machinery, apparatus and appliances, n.e.s.
Office machines and automatic data processing machines 10.7%	2	9.9% Petroleum, petroleum products and related materials
Telecommunication and sound recording apparatus 9.7%	3	9.2% Metalliferous ores and metal scrap
Miscellaneous manufactured articles, n.e.s. 7.0%	4	5.3% Office machines and automatic data processing machines
Textile yarn and related products 6.0%	5	3.7% Professional and scientific instruments, n.e.s.

As a result of the rebalancing policy in China, direct financing or bank loans are shrinking sharply and extending to more and more sectors. Consequently, DSO remains high and late payments are not efficiently regulated.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

The court system is complex and suffers from a lack of transparency, delays and high costs. As enforcement results are poor, amicable or non-litigation collection is the preferred option.

The insolvency framework is complex, with liquidation as the default procedure.