Credit and Caution forecasts a strong rebound from China in 2021

Credit and Caution expects corporate insolvencies in China to increase by more than 20% by 2020. The main victims will be small and medium-sized private enterprises which - even if they operate in well-performing sectors - have limited access to finance. Corporate insolvencies have already increased in the last two years in a context of rebalancing the economy's orientation from exports to domestic consumption. The expansion of the formal economy has led to the fall of many low-cost manufacturers. Vulnerability is concentrated in highly indebted companies in sectors and segments with excess capacity, such as coal and mining, paper, printed circuit boards, textiles, shipbuilding, solar energy, steel and metals. Also, particularly vulnerable are companies which are dependent on exports to the United States, especially in sectors such as metallurgy, electronic machinery, textiles and tyres. 

The Chinese economy was severely affected by the COVID-19 pandemic in the first quarter of 2020. The impact was immediate in the retail and wholesale, travel, leisure, restaurant, real estate, transport and shipping sectors. The cash flow of many Chinese companies was strained by the sharp deterioration in sales and the disruption of operations, which caused major disruption to supply chains. From the second quarter onwards, China recovered growth which is expected to reach 2.5% for the year as a whole.  The strength of the economic rebound is limited by the continued weakness of domestic demand. Consumers remain cautious about spending amid uncertainty about income and employment prospects. At the same time, developments in foreign markets are affecting Chinese exports, which are expected to decline by 2% in 2020.  

For 2021, the forecast is for a strong recovery in growth of around 8%. The main downside risks to this forecast are, on the one hand, the development of the outbreak of coronavirus, both in China and in the rest of the world, and the evolution of the trade dispute with the United States. China is adopting fiscal and monetary measures, but the high level of debt is a problem for the continuity of the stimulus. The government faces a difficult balance between supporting economic growth and ensuring an orderly process of financial deleveraging in the medium term, with total debt close to tripling the size of the Chinese economy. Non-financial corporate debt stands at 155% of GDP. In the case of the central government it remains at a manageable level, below 25% of GDP, but in local governments, including off-balance sheet loans, it amounts to 60% to 70% of GDP.