EcoTV Week

China: new economic slowdown, new rise in credit risks


In China, economic activity contracted in April and the short-term economic outlook remains uncertain. In this complicated environment, how is credit risk evolving?


In China, economic activity slowed significantly in March. Then it contracted in April due to lockdown measures and due to the impact of weaker world demand on export growth. Fiscal and monetary policies are clearly supportive, but yet the short-term economic outlook remains very uncertain. In this complicated environment, how is credit risk evolving?


Credit risks are first fueled by the debt excess of the economy. This debt excess has worsened due to the Covid shock in 2020 and should worsen once again in 2022.

Total domestic debt of the non financial sector was 247% of GDP at end-2019. Debt rose to 270% of GDP at end-2020, as a result of the slowdown in GDP growth and faster credit growth.

The debt to GDP ratio fell back slightly to 264% of GDP at end 2021 thanks to the economic growth rebound and slower credit growth. However, the ratio remains very high. Meanwhile, China’s external debt is very moderate, standing at 15% of GDP.


While the increase in the debt to GDP ratio in 2020 was widespread, its reduction in 2021 is mostly explained by the decline in private corporate debt. The debt to GDP ratio in the state-owned corporate sector has barely improved and is excessively high. And household debt has only stabilized, at 62% of GDP.

Regarding the general government, central government debt remained stable in 2021 and is very moderate. Meanwhile, the debt of local governments increased further in spite of the economic rebound. It appears a moderate burden at first sight. However, the financial position of local governments can change a lot from one province to another. Above all, most local governments continue to supplement their resources thanks to the use of the so-called financing vehicles. These entities have largely contributed to the rise in public corporate debt in the last two years.


The recent fall in activity represents a new severe income shock for corporates and households. This is likely to accelerate the increase in default risks that has already been registered since last year.

The increase in default risks has been most visible in local bond markets. The number of default cases rose by more than 10% in 2021 compared with 2020.

In the banking sector, the average non-performing loan ratio remains low, at less than 2% at end 2021. However, it should increase in the short term. The institutions that are the most exposed to asset quality deterioration are the small commercial banks as well as non-banking financial institutions of the shadow banking sector.


Default risks mostly come from the property sector. Already more than one third of defaults in the bond market were due to property developers last year. And the property market crisis has worsened in recent weeks.

Default risks also increase for firms in the services sectors that are the most affected by the lockdown measures or by recent regulatory tightening. They also increase slowly for financing vehicles and state-owned enterprises.

Lastly, household debt is a source of concern for low-income households, who face a heavy debt servicing burden and are vulnerable to the current deterioration in the labor market.