Emerging

First signs of credit policy tightening

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Eco Emerging // 1 quarter 2021  
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3
CHINA  
FIRST SIGNS OF CREDIT POLICY TIGHTENING  
Economic growth reached 2.3% in 2020. Activity has rebounded rapidly since March and the recovery has gradually  
spread from industry to services. Infrastructure and real estate projects continue to drive investment, but it is also  
beginning to strengthen in the manufacturing sector, encouraged by solid export performance. Private consumption  
is still lagging, but yet has picked up vigorously since the summer. Whereas fiscal policy should continue to be growth-  
supportive in the short term, the monetary authorities are expected to adjust their priorities. Credit conditions  
should be tightened slowly, especially via the introduction of new prudential rules. Corporate defaults are likely to  
increase alongside efforts to clean up the financial sector.  
China has experienced a V-shaped economic recovery since lockdown  
restrictions were lifted last March. After contracting 10% between  
Q4 2019 and Q1 2020, real GDP regained all of the lost ground in just a  
quarter (+11.6% q/q in Q2). Real GDP then rose by 3% q/q in Q3 and by  
another 2.6% in Q4. Moreover, the recovery has gradually spread. The  
rebound was initially driven by industrial production and by investment  
in public infrastructure and real estate, which were buoyed by policy  
stimulus measures. Then the rebound in global demand has boosted  
the export sector. Lastly, the services sector and private consumption  
have regained strength since the summer. In full-year 2020, real GDP  
growth reached 2.3%.  
However, the crisis triggered by the Covid-19 pandemic has left scars.  
Private consumption in particular is still far from returning to normal,  
since households have been hard hit by the downturn in the labour  
market and in disposable income. Moreover, enterprises have faced  
increasing financial difficulties while their debt ratios are excessively  
high. Credit risks are on the rise and we are bound to see an increase  
in corporate defaults both on bank loans and in the bond market. The  
authorities have begun to adjust their credit policy to give priority to  
controlling the risks of instability in the financial sector, albeit without  
thwarting the turnaround in the economy.  
FORECASTS  
2
019  
2020e  
2021e  
2022e  
Real GDP growth (%)  
6.1  
2.3  
2.5  
9.5  
2.3  
5.3  
2.8  
Inflation (CPI, year average, %)  
Official budget balance / GDP (%)  
Central government debt / GDP (%)  
Current account balance / GDP (%)  
Total external debt / GDP (%)  
Forex reserves (USD bn)  
2.9  
-2.8  
17.0  
1.0  
-3.6  
19.5  
2.0  
-3.0  
20.6  
1.7  
-3.0  
22.0  
1.4  
14.4  
3 108  
15.0  
7.0  
16.1  
3 217  
16.5  
6.5  
16.0  
3 260  
15.5  
6.4  
15.6  
3 300  
15.0  
6.5  
Forex reserves, in months of imports  
Exchange rate USDCNY (year end)  
e: ESTIMATE & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
V-SHAPED REBOUND, RETAIL SALES STILL LAGGING  
y/y % nominal change, ytd  
1
5
V-SHAPED RECOVERY IN ECONOMIC ACTIVITY  
The economic recovery has been solid over the last months of 2020  
5
(
chart 1). On the supply side, industrial production has accelerated  
continuously since lockdown restrictions were first lifted in March,  
and reached 7.3% year-on-year (y/y) in December. In 2020, industrial  
production was 2.8% higher in volume than in 2019 (and about +1%in  
value terms given the 1.8% decline in producer prices in 2020).  
-5  
15  
-
In the services sector, the rebound started much later, but activity has  
accelerated strongly since September. After plummeting in Q1, growth  
in the services sector swung from -0.4% y/y in Q2 to +4.3% in Q3. In  
Q4, it finally caught up with and surpassed the growth of industrial  
production (+7.7% y/y). although activity in the services sector slightly  
declined in December, it is expected to resume its role as the main  
growth engine in 2021.  
Investment  
Retail sales  
Exports of goods  
Industrial production  
-25  
2014  
2015  
2016  
2017  
2018  
2019  
2020  
CHART 1  
SOURCE: NBS, CEIC  
inflation has fallen sharply in 2020, dropping from 5% y/y in Q1 to 0.1%  
in Q4. This is mainly due to the major slowdown in food prices, which  
had soared in the last months of 2019 and the first months of 2020.  
Core inflation is also low, but stable (+0.5% since July, down from an  
average of 1.6% in 2019).  
The acceleration in services has kept pace with the renewed vigour of  
private consumption. Although online commerce picked up rapidly in  
Q2, the rebound in retail sales was very hesitant at first and did not  
strengthen until the end of the summer (it reached +5% y/y in Q4). In  
2
020, retail sales volumes were still nearly 5% below the 2019 level.  
Household demand should continue to recover, although it is likely to  
idle somewhat longer given the increase in the number of precarious  
jobs that accompanied the improvement in the labour market and the  
mild increase in disposable income in 2020 (+2.1% in real terms, vs.  
Households are regaining confidence, bolstered by the recent impro-  
vement in the labour market and by declining inflation. The urban  
unemployment rate has fallen since March, and hit 5.2% in November  
and December, the same level as in December 2019. Consumer price  
5
.8% in 2019) and persisting uncertainties over the epidemic situation.  
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Eco Emerging // 1 quarter 2021  
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At the same time, new measures to stimulate private consumption will  
probably be adopted next year, since expanding consumption remains  
a top priority for China’s economic strategy. In the new five-year plan  
presented last fall, the domestic market is clearly specified as one of  
the pillars of economic growth. The details of the 2021-2025 five-year  
plan will be released in March.  
NEW RISE IN DEBT LEVELS  
3
00  
70  
25  
20  
15  
10  
5
Domestic debt of the non-financial sector, % of GDP (LHS)  
Domestic credit, y/y % change (RHS)  
2
Domestic investment has strengthened gradually since Q2, growing by  
2
.9% in full-year 2020. It has been largely fuelled by Infrastructure and  
240  
10  
real estate projects, even though these have recently started to slow  
slightly. Investment in the manufacturing sector has shown signs of  
picking up, bolstered notably by the solid performance of exports.  
2
These exports have rebounded since June and rapidly gained strength,  
rising from an average of +10% y/y (in current USD) for the period  
July-October to an average of 20% y/y in the last two months of the  
year. China has successfully responded to the strong increase in global  
demand for medical supplies and equipment, technological goods, and  
more recently, for other consumer goods such as toys. Export prospects  
are still uncertain, however, since they are dependent on the ongoing  
turnaround in global demand, which hinges on the spread of the  
pandemic, and on future trade talks between Washington and Beijing.  
180  
150  
120  
2017  
2018  
2019  
2020  
CHART 2  
SOURCE: PBOC, BNP PARIBAS  
CORPORATE DEFAULTS ARE EXPECTED TO INCREASE  
PRUDENT CHANGE IN MONETARY AND CREDIT POLICY  
Corporate defaults are expected to increase in 2021 due to the effects  
of the Covid-19 crisis and the corollary impact of efforts to clean up  
the financial sector. The Chinese economy entered the Covid-19 crisis  
with excessively high levels of debt, estimated at 258% of GDP at the  
end of 2019 (domestic debt of the non-financial sector). In 2017-2019,  
measures were implemented to reduce financial risks (including tigh-  
ter regulations, a decline in shadow banking activities, and the start  
of corporate debt reduction), but this movement was cut short by the  
Q1 2020 crisis and the ensuing easing of the monetary and regulatory  
environment. The debt excess of the economy has only worsened: the  
debt-to-GDP ratio is estimated to have increased by about 25 percen-  
tage points in 2020, after a ten-point increase in the previous three  
years (chart 2).  
Fiscal policy and public investment are expected to continue to support  
economic activity. Meanwhile, the authorities have begun to selectively  
tighten their credit policy. Given the solidity of the economic rebound,  
the monetary authorities have now some leeway to adjust their goals  
and give priority to controlling risks in the financial sector. Yet tightening  
the screws on lending will be no easy task. On the one hand, it must  
not hamper the ongoing economic turnaround, nor add to deflationary  
pressures. Beijing probably also wants to avoid accentuating the yuan’s  
appreciation, which has already gained 9% against the USD since the  
end of May 2020. On the other hand, while encouraging healthy loan  
practices, the authorities must continue to support otherwise healthy  
enterprises that are encountering financial difficulties due to the  
Covid-19 crisis, while limiting the risks of instability and bouts of stress  
in the financial sector.  
Although economic activity has returned to normal in most sectors,  
many corporates and households are still in fragile positions after the  
financial losses of the beginning of the year. Domestic credit conditions  
are starting to be tightened and the weight of debt servicing charges  
will increase considerably in the months ahead as post-Covid support  
measures (credit lines, refinancing, rescheduling of debt repayments)  
wind down. In the banking sector, the official non-performing loan ratio  
increased slightly to 1.96% in Q3 2020, which is still low but trending  
slightly upwards. Recent corporate defaults in the local bond market  
also foreshadow more to come. The number of corporate defaults is  
expected to rise rapidly in the coming months. More importantly, the  
share of state-owned enterprises in default is starting to increase,  
The central bank, PBOC (People’s Bank of China), should therefore re-  
main prudent. Since April, it has maintained its key policy rate at 2.95%  
(
after a 30 basis point cut earlier in the year) and gradually tightened  
money market rates until November (the 7-day repo rate rose from an  
average of 1.5% in April to 2.3% in November). Yet, PBOC has reversed  
the trend since December (the 7-day repo rate averaged 1.9% in the  
first two weeks of January 2021). In the very short term, the central  
bank will probably act to ease any excessive tension in the local mo-  
netary and bond markets and maintain liquidity at comfortable levels  
in the financial sector.  
In contrast, the authorities are likely to slowly tighten credit conditions showing proof of a slow decline in implicit state support.  
by acting primarily on the prudential framework and by demanding  
greater discipline from financial players. They have recently introduced  
Completed on 18 January 2021  
rules to put debt limits on real estate developers, and also clearly  
signalled their determination to supervise internet finance more clo-  
sely. In early December, they announced tighter prudential standards  
applicable to banks considered to be too big to fail, and the list of these  
institutions is expected to get longer, notably to increase supervision  
of regional banks. Growth in the social financing stock (total domestic  
credit), which accelerated from 10.7% y/y at year-end 2019 to 13.7% in  
October, already levelled off during the last two months of 2020.  
Christine PELTIER  
christine.peltier@bnpparibas.com  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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