“Chinese growth has not shown the slightest sign of a dip in the past five years. Exports have continually increased while currency reserves have exploded,” says Garth de Klerk, CEO of credit management bureau Coface South Africa. The two-digit growth of 11.4% in 2007 and 11.1% in 2006, coupled with financial soundness including the world’s biggest reserves, continues to surprise analysts. In global terms, China is becoming a major exporter of capital. Nevertheless, De Klerk warns, various weaknesses are concealed behind these excellent performances. “Industrial over-capacity, notably in the automotive, iron and steel and real-estate sectors, could lead to a trimming of company margins which could result in financial difficulties. Signs of this risk are already visible in the extended payment times observed by Coface,” he says. In strict contrast to America, the weaknesses in the Chinese banking sector and the state banking situation seem to be improving, given the fact that the regulations are now more solid. The decline in the number of doubtful debts is seen as a clear reflection of this improvement. De Klerk however stresses that the most worrying problem lies in the auditing of new loans. “The growth of credit to the private sector is still very strong: they represented 108% of GDP in 2006 and 114% of GDP in 2007.” If China’s economic growth is not carefully controlled, the offer in certain sectors can increase more quickly than demand itself, and a deflationary crisis could occur. “The authorities are consequently aiming to slow investment and avoid over-capacity. In order to achieve this, a new rule has been introduced, preventing manufacturers from making investments if they use less than 80% of their production capacities,” explains De Klerk. Despite China’s extraordinary growth, the potential risks should not be overlooked. A hard landing is still possible, given the over-capacity present in certain sectors. Two growth hypotheses are consequently possible. “A recession linked to a deflationary crisis is unlikely but faced with a cut in their margins companies will have to lower their prices, which could lead to a chain of bankruptcies. “A gentle landing is more likely with the level of growth gradually coming down to 7 or 8% per year. But a slower increase in profits could endanger the least competitive companies, notably in markets where supply exceeds demand, and thereby increase the credit risk. The Chinese authorities are consequently faced with the tricky task of slowing growth, rather than halting it completely,” De Klerk concludes.
