CHINA

The leeway for policy support is declining

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

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GDP	USD 14342bn (World ranking 2, World Bank 2019)
Population	1397mn (World ranking 1, World Bank 2019)
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

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An uneven recovery

China’s economic growth is set to decline markedly in 2020 as a result of the global Covid-19 pandemic. We expect GDP growth at +1.5% in 2020, after +6.1% in 2019. After the epidemic was controlled domestically in China, the resumption of economic activity has been gradual and uneven. The recovery in the manufacturing sector may be capped by subdued private consumption (as a result of lower consumer confidence and disposable income) and global trade being under pressure (as China’s trading partners exited Covid-19-related lockdowns later). On the positive side, policy-driven sectors such as infrastructure and construction are rebounding more quickly. Although it avoided setting a growth target for 2020, the Chinese leadership has emphasized employment as a priority. Policy support is turning more aggressive to safeguard jobs. We estimate that fiscal stimulus in 2020 will amount to 6.7% of GDP (compared with 5.7% over 2018-19). The monetary policy has also become more accommodative, with a special focus on micro and small enterprises. We expect the economic recovery to become more visible in the second half of 2020, as long as downside risks do not materialize. These include the risks of new Covid-19 outbreaks and rising protectionism (e.g. tensions between the U.S. and China).

Macro-policies: reticient stimulus

While stepping up fiscal support in 2020, the Chinese leadership is wary of undoing the efforts of fiscal discipline. This is because public finances have deteriorated markedly over the past ten years. Risks remain manageable at this stage. In particular, the composition of Chinese public debt is “safer” when compared to other economies, with a limited exposure to external investors. Public external debt is c.2% of GDP.

On the monetary side, risks are relatively contained. Inflation should average less than 3% over 2020. Downward pressures on the currency remain in the context of the global pandemic and the tense relationship with the U.S., but with no sign of acute capital outflows pressures. As a result of a leverage control campaign launched in 2017, financial risks have reduced slightly, with a decrease in shadow banking and a stabilization of corporate debt. Yet, we remain cautious regarding the outlook. The monetary policy stance of China’s central bank has shifted to easing in order to support economic growth, leading to a re-acceleration of credit and possibly shadow banking. The situation of smaller banks in particular, which are exposed to more vulnerable firms, needs to be monitored.

External position: weakening but still strong

China’s external position is relatively strong. External debt is generally low (c.16% of GDP in 2019). The current account balance is at a satisfactory level (in surplus at 1.0% of GDP in 2019). FX reserves are still at a high level, covering more than 15 months of imports. Yet, the trend is clearly downwards: while the current account was 10% of GDP in 2007, we expect it to be roughly neutral in 2020, and FX reserves reduced by -22% between June 2014 and April 2020.

Business environment: changing the rules of the game

The business environment is improving. China jumped to the 31^st rank in the World bank Doing Business survey in 2019 (from 46^th in the previous edition and 78^th the one before). This progress reflects an improvement 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 (in the automotive sector, consumer goods, for e.g.) 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 18.0%	1	10.4% Korea, Republic of
Hong Kong 14.6%	2	9.0% Japan
Japan 6.0%	3	8.6% Taiwan
Korea, Republic of 4.4%	4	8.6% United States
Germany 3.0%	5	5.0% Germany

Trade structure by product

(% of total)

Exports	Rank	Imports
Electrical machinery, apparatus and appliances, n.e.s. 13%	1	20% Electrical machinery, apparatus and appliances, n.e.s.
Telecommunication and sound recording apparatus 12%	2	9% Petroleum, petroleum products and related materials
Office machines and automatic data processing machines 9%	3	9% Metalliferous ores and metal scrap
Articles of apparel & clothing accessories 8%	4	5% Professional and scientific instruments, n.e.s.
Miscellaneous manufactured articles, n.e.s. 7%	5	5% Road vehicles

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.