Perspectives

The tightening in credit conditions is a delicate exercise

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Eco Perspectives // 1 quarter 2021  
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CHINA  
THE TIGHTENING IN CREDIT CONDITIONS IS A DELICATE EXERCISE  
Economic activity has rebounded rapidly since March and has gradually spread from industry to services.  
Infrastructure and real estate projects continue to drive investment, but it has also begun to strengthen in the  
manufacturing sector as well, encouraged by solid export performance. Lastly, 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 and return their focus on controlling  
financial risks. 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  
GROWTH AND INFLATION (%)  
2
019 and Q1 2020, real GDP regained all of the lost ground in just  
a quarter (+11.7% q/q in Q2). Real GDP then rose by 2.7% in Q3 and  
is expected to gain another 2% in Q4. Moreover, the recovery has  
gradually spread and strengthened. 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 is expected to reach  
GDP Growth  
Inflation  
Forecast  
Forecast  
8.6  
8
6
4
2
0
.0  
.0  
.0  
.0  
.0  
6
.1  
5.3  
2
% (chart 1).  
2.9  
2.8  
2.8  
2
.3  
2
.0  
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 on bank loans and in the bond market. The au-  
thorities 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.  
2019  
2020  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
ECONOMIC ACTIVITY NORMALISES, BUT RETAIL SALES STILL LAG  
y/y % nominal change, ytd  
V-SHAPED RECOVERY CONFIRMED  
1
5
5
5
The economic recovery has been solid over the last months of 2020  
(
chart 2). On the supply side, industrial production has accelerated  
continuously since lockdown restrictions were first lifted in March,  
and reached 6.9% year-on-year (y/y) in September and October. In the  
first ten months of the year, industrial production was 1.8% higher in  
volume than the 2019 figure. In value terms, it has remained virtually  
flat given the nearly 2% decline in producer prices in 2020.  
-
-
-
15  
25  
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% in  
Q3. In October, it finally caught up with and surpassed the growth of  
industrial production (+7.4%). These sector dynamics are expected to  
continue in the short term, and services will resume their role as the  
main growth engine in 2021.  
Investment  
Retail sales  
Exports of goods  
Industrial production  
2
014  
2015  
2016  
2017  
2018  
2019  
2020  
CHART 2  
SOURCE: NBS, CEIC  
The acceleration in services 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  
consolidate until the end of the summer (+4.6% y/y in October). In the  
first ten months of the year, retail sales volumes were still nearly 8%  
below the 2019 level.  
Households are regaining confidence, bolstered by the recent  
improvement in the labour market and by declining inflation. The urban  
unemployment rate has fallen since March, and hit 5.3% in October, the  
same level as at the beginning of the year. Consumer price inflation has  
fallen sharply since July, dropping from 2.7% y/y to a negative 0.5% in  
November. This is mainly due to the major slowdown in food prices,  
which had soared in Q4 2019 and in the first months of 2020. Core  
inflation is also low, but stable (+0.5% since July, down from a 2019  
average of 1.6%).  
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  
still mild increase in disposable income (+0.6% y/y in real terms in  
the first nine months of 2020). At the same time, new measures to  
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Eco Perspectives // 1 quarter 2021  
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6
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.  
DEBT SWELLS AGAIN  
3
2
2
2
1
1
1
00  
70  
40  
10  
80  
50  
20  
25  
Domestic debt of the non-financial sector, % of GDP (LHS)  
Domestic credit, y/y % change (RHS)  
Domestic investment also strengthened in October (+1.8% y/y in the  
first ten months of 2020), largely fuelled by Infrastructure and real  
estate projects. Investment in the manufacturing sector is still weak,  
although it has shown signs of picking up, bolstered notably by the solid  
performance of exports. They 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 21% in November. 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.  
20  
15  
10  
5
2017  
2018  
2019  
2020  
SOURCE: PBOC, BNP PARIBAS  
CHART 3  
THE AUTHORITIES READJUST THE CREDIT POLICY  
Investment in infrastructure projects is expected to remain dynamic  
in the short term while real estate investment could lose some CORPORATE DEFAULTS ARE EXPECTED TO INCREASE  
momentum, in response to economic policy adjustments. Fiscal policy  
Corporate defaults are expected to increase in 2021 due to the impact  
and public investment are indeed expected to continue to support  
of the Covid-19 crisis and the corollary impact of efforts to clean up  
economic activity. Meanwhile, the authorities have begun to selectively  
the financial sector.  
tighten their credit policy.  
The Chinese economy entered the Covid-19 crisis with excessively high  
Given the solidity of the economic rebound, the monetary authorities  
debt, estimated at 258% of GDP (domestic debt of the non-financial  
have now some leeway to adjust their goals and give priority to  
sector at year-end 2019). In 2017-2019, measures were implemented  
controlling risks in the financial sector. Yet tightening the screws on  
to reduce financial risks (tighter regulations, a decline in shadow  
lending will be no easy task. On the one hand, it must not hamper  
banking activities, and the start of corporate debt reduction), but this  
the ongoing economic turnaround, nor add to deflationary pressures.  
movement was cut short by the Q1 2020 crisis and the ensuing easing  
Beijing probably also wants to avoid accentuating the yuan’s  
of the monetary and regulatory environment. The debt excess of the  
appreciation, which has already gained 7% against the USD over the  
economy has only worsened. The increase in the social financing stock  
past six months. On the other hand, while encouraging healthy loan  
(
total credit) accelerated from 10.7% y/y at year-end 2019 to 13.7% in  
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.  
October (it is expected to level off during the last months of the year).  
The debt-to-GDP ratio is projected to increase by about 25 percentage  
points in 2020, after a ten-point increase in the previous three years  
(
chart 3).  
Since April, the central bank has maintained its key policy rate at  
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. 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 could rapidly exceed the 2018-2019 levels. More  
importantly, the share of state-owned companies in default seems to  
be increasing, showing proof of a slow decline in implicit state support.  
2
.95% (after a 30bp cut earlier in the year), but has gradually tightened  
money market rates (the 7-day repo rate rose from an average of 1.5%  
in April to 2.3% in November). Even so, the central bank will probably  
limit the rise in domestic interest rates and also maintain liquidity at  
comfortable levels in the financial sector.  
In contrast, the authorities are likely to slowly tighten credit conditions  
by acting primarily on the prudential framework and by demanding  
greater discipline from financial players. Last month they already  
introduced rules to put debt limits on real estate developers. They have  
also clearly signalled their determination to supervise internet finance  
more closely. 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.  
Completed on 14 December 2020  
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