The slowdown in China's economic growth has paused since the second quarter of 2016 thanks to stimulus policy measures. The stabilisation in industrial production growth, the upturn in the real estate market and monetary loosening could help reduce pressures on corporates and local governments by easing their liquidity constraints in the very short term. However, their solvency is not improving, their debt levels have become even more excessive over the last year and their capacity to service their debt remains weak. In this context, credit risks in the financial sector continue to increase and the performance of commercial banks deteriorates gradually.
- Corporates breathing a little easier
Signs of economic growth stabilisation that appeared in March 2016 have continued during the summer. After bottoming out in January and February, industrial production growth has remained above 6% in year-on-year terms (see chart). Although this remains very low, the improvement has been accompanied by a slight upturn in the average performance of manufacturing corporates. Their aggregate profits have started rising again (+8.4% y/y in the first eight months of 2016) after falling throughout 2015 (-2.3%). Demand for industrial goods has been boosted by monetary and fiscal stimulus measures (which have especially helped infrastructure projects, the real estate market and the auto sectors). Commodity prices have rebounded since the start of the year, and producer price deflation has become gradually less severe (-0.8% y/y in August vs. -5.9% in December 2015) and eventually turned slightly positive in September.
However, the situation in the industry remains very fragile, and there are wide variations between different sectors and different types of corporates. In particular, state-owned industrial enterprises are much less profitable than their private-sector peers, and their profits continued to fall in the first eight months of 2016 (-2.1% year-onyear vs. -21.9% in 2015) because of their lower productivity, higher indebtedness and greater exposure to sectors suffering from large production excess capacities. These difficulties, along with the durable weakening in China’s export prospects, have continued to constrain growth in manufacturing investment (to 3.1% y/y in nominal terms in the first nine months of 2016, after reaching an alltime low of 2.8% in Jan.-August 2016).
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by Christine PELTIER