Economic studies
China

China

Population 1, 390.1 billion
GDP per capita 8,643 US$
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 6.7 6.9 6.6 6.2
Inflation (yearly average, %) 2.1 1.6 2.3 2.5
Budget balance (% GDP) -3.0 -3.7 -3.7 -4.0
Current account balance (% GDP) 1.7 1.3 0.8 0.3
Public debt (% GDP) 44.3 47.0 50.0 54.0

 

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

STRENGTHS

 

  • Sovereign risk contained as public debt remains mainly domestic and denominated in local currency
  • Reduced risk of 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
  • Current account surplus expected to narrow and eventually turn into deficit
  • Exposure of banks to rising corporate debt levels
  • Government strategy is ambiguous on arbitrating between reform and growth
  • Ageing population; gradual depletion of cheap labour pool
  • Environmental issues
  • Weight of SOEs in the economy

Risk assessment

Gradual deceleration in 2019

China’s economic growth is set to slow to around 6.5% in 2018. This moderation will likely continue into 2019. This weaker activity has been brought about by policies aimed at curbing both financial vulnerabilities and asset bubble risks. Corporate indebtedness remains the main risk in the Chinese economy. Adding to these headwinds, an escalation of trade tensions between the United States and China is expected to start to affect growth in 2019. Tariffs on USD 250 billion worth of Chinese exports were implemented in 2018, and it is possible that more will come in 2019. Moreover, the effects of a cooling property sector are expected to impact the real economy in 2019. Household consumption, which accounts for two-thirds of GDP, has remained on target, supported by relatively low inflation and rising wages. Signs are less positive on the private investment front, as it is set to slow as a result of lower business sentiment and lower earnings – however, this decline will be offset by higher public spending. Fiscal policy will turn expansionary in 2019 to buffer the economy from external risks. The People’s Bank of China (PBOC) maintains a “prudent” stance. Monetary policy will arbitrate between accommodation and tightening in 2019, with the goal to manage the gradual slowdown and trade war impact.

Current account surplus to deteriorate

Exports in CNY terms increased by 7.9% year-on-year in the first nine months of 2018, compared to an expansion of 10.8% year-on-year in 2017. This is consistent with a softening in global trade. Slower external demand is set to continue in 2019. US tariffs will likely add to existing pressures. For these reasons, exports will likely expand at a slower rate going forwards. Although the yuan’s significant depreciation in 2018 helped to improve China’s terms of trade, it also led to a decline in foreign exchange reserves. Policymakers will likely intervene in forex markets to avoid overshooting depreciation expectations, as these could trigger outflows once again; even if capital controls remain firmly in place. While the current account returned to a surplus in the second quarter of 2018, lower export and faster import growth will likely result in a narrowing of China’s current account, which shall nevertheless remain in surplus. FDI increased, but will likely decline once headwinds to growth begin to blow.

Overall indebtedness in the Chinese economy remains extremely elevated (more than 260% of GDP). Most of the debt is owed by corporations, a large proportion of which are State-Owned Enterprises (SOEs). Many of these are “zombie” enterprises: those that are struggling with high levels of debt and overcapacity, but are kept afloat because they generate employment and output. In addition, corporate debt is difficult to assess due to the expansion of shadow banking. Moody’s estimates that shadow banking assets peaked at 87% of GDP in 2016, although they fell to 73% at the end of June 2018. The figure could be higher when taking into account other types of financial intermediation by banks, including Wealth Management Products (WMPs). The government has been trying to curb this type of lending, leading to overall higher levels of loans on bank’s balance sheets. This is positive from a macro-prudential standpoint. However, curbing shadow banking activities has had a negative impact on the financial conditions of SMEs. Finally, public debt may be higher than reported if the surge in local government financing through local government financing vehicles (LGFVs) is factored into the calculation.

Entering unchartered territory

During the 19th National Congress of the Communist Party of China (CPC) in October 2017, all members of the Politburo Standing Committee – excluding President Xi Jinping and the Premier Li Keqiang – retired. The new line-up includes Li Zhanshu, Wang Yang, Wang Huning, Zhao Leji and Han Zheng. Xi Jinping did not announce a successor – he instead abolished presidential limits, paving the way for an extended tenure, and consolidating even more power under a series of executive bodies directly under his supervision. “Xi Jinping Thought”, a political theory, was also written into the constitution, setting a clear departure from previous party consensus, which favored decentralisation of power. On the foreign policy front, fears of a fully-fledged US-China trade war have materialised. This is expected to have an impact equivalent to at least 0.5% of GDP, although this could be as much as 1% if the United States forges ahead with 25% tariffs on all Chinese imports. External threats are sizeable enough to justify an appropriate policy response. This raises questions as to what direction policy will take following the annual plenary sessions of the People’s Congress and the Chinese People’s Political Consultative Conference in March 2019.

 

Last update : February 2019

China

Payment

Cash payment is usually used for face-to-face domestic retail transactions. Due to tight capital controls imposed by the authority, an indidival 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 suporting 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 pratice, 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 acknowlegdes 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 which 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 bankrptcy. 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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