Economic analysis
China

China

Population 1, 395.4 million
GDP per capita 9,580 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 6.9 6.6 6.1 5.8
Inflation (yearly average, %) 1.6 2.3 2.5 3.0
Budget balance (% GDP) -3.0 -3.7 -4.0 -4.0
Current account balance (% GDP) 1.3 0.4 0.0 -0.2
Public debt (% GDP) 47.0 50.0 54.0 55.0

(e): Estimate. (f): Forecast.

STRENGTHS

  • Sovereign risk contained as public debt remains mainly domestic and denominated in local currency
  • Reduced risk of (private) external over-indebtedness thanks to the high level of foreign exchange reserves
  • Gradual move up global value-chains as part of China 2025
  • Dynamic services sector, led by e-commerce trends
  • Good level of infrastructure

WEAKNESSES

  • High corporate indebtedness to impact growth potential
  • Dependency on imports of key technology components
  • Current account surplus expected to narrow and eventually turn into deficit
  • Misallocation of capital to SOE sector to erode long-term potential growth
  • Government strategy is ambiguous on arbitrating between reform and growth
  • Ageing population, resulting in high public expenditure and higher labour costs
  • Environmental issues

Risk assessment

Growth to dip below 6.0%

China’s GDP is expected to fall below the watershed level of 6.0% in 2020. This is the result of both structural and cyclical factors. China continues its gradual rebalancing process towards a consumption-oriented economy, with a focus on quality over quantity of growth. Corporate indebtedness and demographics pose threats to the long-term outlook of the economy, requiring structural reforms that take time. Cyclical factors are adding to the pressures. Trade tensions between the United States and China have somewhat eased with the partial trade deal announced in December 2019, but existing tariffs will continue to exert downside pressure on Chinese growth with a 0.7% impact on GDP. Exports contracted by -0.8% in the first three quarters of 2019. This led to PMIs falling into contractionary territory for most of 2019, a trend that is set to extend into 2020. The indirect impact via sentiment channels is also noteworthy. A sluggish manufacturing sector, which accounts for 40% of GDP, will have negative spill over effects on domestic demand and services through income and employment channels. As a result, household consumption, which accounts for a much larger portion of GDP, about 65%, is set to slow further from 8.0% on average in 2019. An uptick in inflation, on the back of soaring pork prices following an outbreak of the African Swine Fever, may further dampen domestic demand. Private investment has also remained sluggish, slowing to 5.4% year-on-year in the first three quarters of 2019, as business sentiment drags amid lower earnings and profits. Measures to stabilize the housing market will continue to remain in place, removing any upside on prices.

Despite these headwinds, the authorities have been moderate in their approach to stimulus. An additional package of fiscal measures worth 4 trillion yuan was announced in March 2019. Beijing did not expand these despite weaker growth in Q3. In addition, the People’s Bank of China (PBOC) has only implemented targeted monetary stimulus measures, including Reserve Requirement Ratio (RRR) cuts and liquidity injections via open market operations (OMOs). These serve the purpose of limiting the risk of an interbank liquidity squeeze and supporting Small and Medium Enterprises (SMEs). At a systemic level, outstanding credit growth has remained flat, expanding by 10.6% YOY in the first nine months of 2019, compared to 11.2% in 2018.

 

Current account deficit amid credit concerns

Imports contracted faster than exports in 2019. However, we envision that the economy will register a very modest current account deficit in 2020, driven by measures to boost consumption and weak external demand. Policymakers are likely to intervene in forex markets to avoid overshooting depreciation expectations. A weaker yuan may help to boost China’s terms of trade, but it may also reignite capital outflows; even if capital controls remain firmly in place. A small current account deficit poses no threat in the medium term. However, it could aggravate existing credit risks depending on how it is financed. China continues to receive a large amount of Foreign Direct Investment (FDI), but a rapidly ageing population and a dwindling trade surplus may impair its ability to generate savings that are significant enough to adequately finance the systemic build up in debt in the long run.

Debt levels remain extremely elevated (260% of GDP), with most of it being owed by corporations. A large proportion of these companies are struggling with high levels of debt and overcapacity; and are predominantly state-owned. Moreover, corporate debt is difficult to assess due to the expansion of shadow banking. Moody’s estimates that shadow banking assets fell to 67% at the end of March 2019. The figure could be higher when taking into account other types of financial intermediation by banks, including Wealth Management Products (WMPs). Finally, public debt may be higher than reported if you include the surge in local government financing through bond issuance and special purpose vehicles.

 

Less politics, more pedalling on reforms

Political factors have all posed challenges for the Chinese economy in 2019. Beijing’s response has comprised of hardening the official rhetoric, both domestically and in terms of its foreign policy. For example, the Third Plenum of the Communist Party of China (CCP), which usually emphasizes economic reforms, focused on intra-CCP discipline instead. We expect that tensions with the U.S. continue to play a role in the long term, even in case both sides finally reach an agreement to deescalate trade tariffs. Beyond trade, both sides may intensify targeted attacks on individual companies, in line with what we have seen so far with Huawei, ZTE and FedEx.

 

 

Last update : February 2020

Payment

Cash payment is usually used for face-to-face domestic retail transactions. Due to tight capital controls imposed by the authority, an individual can only purchase up to USD 50,000 each year. Furthermore, when a Chinese company makes an international payment in a foreign currency, the company must submit a foreign currency payment application with the local bank, along with supporting documents like sales contracts and invoices. The whole process can be quite lengthy and it is possible that the bank will reject the transaction.

Commercial Acceptance Drafts (CAD) and Bank Acceptance Drafts (BAD) are both common methods of payment for Chinese companies. These are two negotiable instruments: whereas CAD is issued by companies to entrust the payer to unconditionally pay the specified amount to the beneficiary on the date, BAD is issued by the acceptance applicant, entrusting the acceptance bank to make unconditional payment of a certain amount of money to the payee or bearer on the designated date. In practice, BAD is regarded as safer and therefore more accepted than CAD.

Letter of credit and cheques are also used, but are less popular in China. The use of letters of credit is typically confined to big companies; and cheques are used infrequently by both individuals and companies.

SWIFT bank transfers are also among the most popular means of payment as they are rapid, secure, and supported by a developed banking network, both internationally and domestically.

 

Debt Collection

Amicable phase

The creditor makes phone calls and sends letters of collection to chase the debtor for payment. If debtor is responsive and acknowledges the debt, the two parties will negotiate payment plans to try to have payment settled. In the existence of a dispute, both parties need to come to an agreement or offer discount on debt amount.

 

Legal proceedings

The Chinese court system is complex. It is divided into multiple tribunals at different levels. The basic People’s Courts are at the lowest level with the County People’s Courts or Municipal People’s Courts. The basic People’s Courts have jurisdictions over most cases of first instance. Intermediate People’s Courts handle certain cases in first instance, such as major foreign-related cases, as well as appeal proceedings brought against decisions rendered by the basic People’s Courts. At the Higher level, the High People’s Courts decide on major cases in first instance. The Supreme People’s Court is at the highest level, which handles interpretation issues, and has jurisdiction over cases that have a major impact nationwide.

 

Fast-Track Procedure

If the debt is purely monetary, there are no other debt disputes between the creditor and the debtor, and the repayment order can be served on the debtor, the creditor can apply for a repayment order against debtor with the court. The debtor has 15 days to repay the debt after the order is issued; otherwise, he must submit a defence before the payment deadline. If debtor fails to do either, the creditor can apply for enforcement. However, if debtor’s written defence or objection is approved by the court and the ruling for terminating the debt payment order is issued, the debt payment order will be invalidated and the creditor can choose to pursue legal action. In practice, creditors do not usually use the fast-track procedure and will immediately initiate legal proceedings when the amicable phase fails.

 

Ordinary Procedure

Legal proceedings commence with the creditor lodging the case and submitting statement of claims with the court with corresponding jurisdiction. Once the case is accepted, court summons will be delivered to parties involved. Usually within one month, the first hearing will be arranged and the court will make a final attempt to reach a payment agreement between creditor and debtor via

mediation. If no agreement can be reached, the litigation continues with several rounds of hearings, before a judgement is rendered by the court.

In theory, a first instance ruling could be rendered within six months after the case’s acceptance, but in practice, proceedings can last longer as the complexity of the case increases (for example, when there is more than one creditor, or when a foreign party is involved). In some cases, the whole process can last to one to two years. Furthermore, appeal proceedings must be terminated within three months after appeal acceptance.

 

Enforcement of a Legal Decision

Domestic judgments, once obtained, can be executed by, for example, seizing the debtor’s bank accounts, property, or by a transfer of rights. The creditor can apply for enforcement with the People’s Court or with an enforcement officer.

For foreign judgments, the recognition and enforcement is based on the provisions of an international treaty concluded or acceded to by both China and the foreign country or under the principle of reciprocity. In practice, enforcing foreign arbitral awards is easier than enforcing foreign court decisions in China, because over 150 countries including China have signed and ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, June 10, 1958).

Another method of enforcement is the “Arrange­ment on Reciprocal Recognition and Enforcement of judgments in Civil and Commercial Matters” (REJA) between China and Hong Kong. There are similar arrangements between mainland China and Macao, as well as between mainland China and Taiwan. It provides a legal basis for Chinese courts to enforcement judgments from Hong Kong, Macao, and Taiwan. It allows creditors to use courts from Hong Kong, Macao, and Taiwan for cases in mainland China.

 

Insolvency Proceedings

Parties may agree debt restructuring arrangements without going to court. However, such arrangements must not jeopardize the interests of any other creditors – otherwise, they may subsequently be declared invalid in any court bankruptcy proceedings.

The 2007 Chinese enterprise bankruptcy law sets out three types of formal bankruptcy proceedings: bankruptcy, reorganization and reconciliation.

 

Restructuring proceedings

This can prevent a company with plentiful assets while experiencing cash flow difficulties from entering bankruptcy. Either debtor or creditor can apply with the court for Restructuring, which allows debtor to manage its properties under an administrator’s supervision. A restructuring plan should be approved by a majority of creditors in each voting class (secured, creditors, employees…) at creditor’s meetings, then sent to the court for approval within ten days from the date of adoption.

After the implementation of the restructuring plan, the administrator will supervise and submit report on debtor’s performance with the court. The administrator or debtor must file an application to the court for approval within ten days from the date of adoption.

 

Reconciliation

This procedure allows the company to settle its liabilities with its creditor prior to the court declaration of debtor’s bankruptcy. The debtor directly submits a payment proposal to the court and upon receiving court’s approval on compromise payment proposal, the debtor will recover its properties and business from the administrators. The administrator will supervise debtor’s performance and report to the court. If the debtor fails to implement the compromise proposal, the court will terminate this procedure and declare debtor bankrupt as requested by the creditors.

 

Bankruptcy

The procedure has the purpose to liquidate an insolvent company and distribute its assets to its creditors. The bankruptcy request should be applied with the court and the request can be sent both in the name of debtor and a creditor. Once accepting the bankruptcy petition, the court will appoint an administrator from the liquidation committee and debtor will be notified within five days and is required to submit financial statement to court within 15 days. The administrator will verify the claims and distribute the assets to creditors. After the final distribution is completed, the court will receive administrator’s report and decide whether to conclude the proceedings within 15 days.

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