China in 2014: stable growth with risks of financing and overcapacities. Risks remain in several sectors
Since the Third Plenary Session of the 18th Communist Party of China Central Committee (CPCCC) in November, a broad spectrum of exciting reform plans have been announced, and the government had a series of follow-up actions. These are clear signals that the Chinese effort to restructure the economy is more than just rhetoric.
While we should be excited for the many moving parts in the Chinese economy, we cannot forget about the risks. In the near-term, potential negative impacts on the real economy as a result of the reform effort and credit risks associated with the rising cost of fund have to be watched out for.
We characterize 2014 as a year of divergence for the Chinese economy, representing the diverging trends of macro and micro environments. On the macro side, economic growth will remain strong with headline economic growth mildly slowed to 7.2% YoY, while other key macro indicators will remain stable.
But businesses will be facing challenges. Our sector barometer --- which reflects financial performance of companies in various industries as well as our payment experience --- shows that there are rising risks in the Chinese economy. Particularly for companies in the electronics sector --- where we have seen deteriorating payment experience --- credit management practices should be adopted.
Items on the Chinese reform agenda, like measures against overcapacity issues, would benefit the oversupplied industries in the long-run but turbulence shall be expected in short and medium terms. The steel and coal industries should benefit from the leaders’ determination to speed up urbanization in the country, but the demand growth is only coming from selected regions as a result of the leaders’ determination to cut overcapacity. With environmental-friendly policies in the pipeline, these sectors will see continual shakeups, while smaller and inefficient industry participants will see pressure intensifying in the near-term.
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