Within the past few months, the Chinese government has announced a number of broad economic reforms. The movement toward a more open economy is good news for foreign firms, but it also creates 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 funds have to be watched out for,” says Rocky Tung, Asia Pacific economist with credit insurer Coface.
Coface recently released a report describing those risks in detail. It predicts that although Chinese leaders are hoping consumer spending will take over as the nation’s primary driver of economic growth, business investment will retain that position through 2014. For that reason, the rising interest rates Coface expects to see may have a significant effect on the health of the economy.
Coface expects China’s macroeconomic growth to remain stable in 2014 (see Figure 2). “Reforms are the key focus for the country in 2014,” Tung says, “while counter-cyclical measures will be adopted to maintain growth at 7 to 8 percent.”
In this environment, borrowing will become more challenging for many companies. “With stable money supply growth, overall liquidity could become even tighter in 2014,” Tung says. Many local and provincial projects started in China in 2009 to 2010 were financed with bonds and trust loans with three- to five-year maturities. “These repayment obligations will further tighten liquidity in the market,” Tung adds. “Development in this area has to be watched out for in 2014.”