Increase in industrial production (+ 6.9% in October year-on-year), recovery for the service industry (+ 7.4%), acceleration of job creation (+ 15.6%), signing of a vast trade agreement with Asean and five other countries (RCEP, signed on November 15)… China's recovery is not questionable. But disinflation and payment defaults by state-owned companies are darkening the picture, a Credit Agricole note warns.
Supply drives activity while consumption figures are disappointing.
While production is dynamic again, domestic demand is not keeping up. Chinese people are building up or restoring emergency fund and have not yet returned to consumption.
In October, retail sales increased by 4.3% year-on-year when 5% was expected. Admittedly, this increase is higher than that of September (+ 3.3%), but the supply / demand gap persists and can be seen in the inflation figures, in clear slowdown (+ 0.5% in October after + 1 , 7% in September). Unlike the United States, Europe, Russia and Turkey, this part of the Chinese economy does not follow a V-curve.
“The current disinflation trajectory in China is a sign that we may not have all the parameters to construct our scenario, because the fall in food prices is not sufficient to explain this phenomenon, even though the 'activity is picking up again and that - unlike in Europe or Japan - the Central Bank is far from having reached zero rates, ”analyzes Sophie Wieviorka, specialist in the Asia zone (excluding Japan) at Crédit Agricole. Another concern, according to this economist: the health of public enterprises.
A worrying series of defaults on payments by public companies
After energy group Yongcheng Coal & Electricity announced that it had defaulted on one billion yuan (around 130 million euros), semiconductor maker Tsinghua Unigroup and automaker Brilliance Auto Group have just declared that they could not face their next repayment deadline. And that they would not be supported by the state. This is all the more worrying when we consider that Chinese companies have traditionally been viewed as safe investments by agencies and investors. In addition, says Sophie Wieviorka, transparency efforts are necessary because "the companies that failed were for the most part rated AAA".
Politically, "the strategy is not very clear yet." Indeed, the (relative) disengagement of the State from these gigantic companies, does not fit well with the recent speeches of Xi Jinping singing the praises of the planned economy. This wave could also be an operation to "clean up" over-indebted companies to reassure the new foreign investors that Beijing wants to attract to its bond market.
In any event, it will be necessary to wait at least until the first quarter of 2021 and the end of the exceptional support measures linked to Covid-19 (moratoriums on certain loans in particular) to really see the liquidity crisis of Chinese public companies. "The number and amount of defaults will be an indication of the state in which Covid-19 has really left the Chinese economy," concludes the economist.
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