WEALTH

What lies ahead
for the Chinese
economy?
Insolvencies are
rising and
affecting the
neighbors too
ways to avoid filing for bankruptcy, such as merging or expanding.
Fearing unrest caused by jobs losses, local governments frequently prop
up smaller companies in such industries as steel, concrete and shipping,
with cheap loans. The result is zombie companies that often stay open to
obtain more subsidies.
In real terms, this means that in 2015
and 2016, up to 7,000 companies may be
wiped out, with the sectors construction,
machinery and equipment, and mining
being particularly vulnerable. Technology
and electronics are also precarious, as they
experienced rapid DSO increases in 2015,
while primary industrial commodities are
still struggling against a prolonged global
price collapse.
However, the actual number of corporate
failures in China could be significantly higher.
As insolvency procedures are complicated and
expensive, Chinese enterprises find alternative
ACCOUNTS PAYABLE OUTSTANDING
China is not alone in its woes. Insolvencies are expected to rise this year
by over 15% in neighboring Hong Kong and Singapore, two transport
hubs highly exposed to the global slowdown in trade (exports represent
more than 150% of GDP). All three markets are being hit by the economic
slowdown, but in China the weaker projected growth of 6.5% in 2016 and
6.4% in 2017 is only part of the cause.
The European Union Chamber of Commerce in China recently
highlighted how overcapacity in Chinese industry, fueled by easy
loans and subsidies, is having an “ever more destructive” effect on both
China’s domestic and the global economy. The report, Overcapacity
in China by Roland Berger, shows how overcapacity has grown since
the government unveiled a stimulus package following the 2009
financial crisis.
This is provoking cut-throat competition within China, holding back
the country’s ability to reform, and causing rising trade tension with
other countries. For example, steel production is untethered from real
market conditions and China has more than doubled the combined
production of the next four leading producers. In 2015, China produced
more than half of global cement production.
Allianz • 47