China’s retail-sector borrowing ‘fell off a cliff’ in late 2020, with many small firms unable to access credit, report says

Andrew Mullen
·5-min read

Borrowing by China’s already struggling retail sector “fell off a cliff” at the end of this year, with small firms also still struggling to access credit amid a weak recovery in consumer spending, according to a new report.

Loan-rejection rates in the retail sector increased to 38 per cent in the final quarter of 2020 from 14 per cent in the third quarter, according to the latest quarterly report from China Beige Book International, which conducts an independent survey of different aspects of the Chinese economy.

Rejection rates for small and medium-sized (SMEs) businesses rose to 24 per cent in the final quarter from 14 per cent in the third quarter, but the rate for microenterprises fell to 16 per cent from 30 per cent.

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In contrast, rejection rates for large firms rose marginally to 12 per cent from 10 per cent during the same period.

“Retail borrowing fell off a cliff in quarter four, due in large part to skyrocketing loan rejections. This occurred despite some of the cheapest rates [for those that could borrow] in almost a decade. SMEs are similarly getting cut out of the buffet line,” the report said.

Large firms continued to gobble up whatever credit was available, enjoying much lower capital costs than their smaller counterparts, alongside higher loan applications and still-falling rejections,” it added. “This is the opposite of the quagmire [that] small-and-medium enterprises find themselves in, with their falling borrowing levels due primarily to a giant surge in loan rejections. SMEs that can sell bonds are doing more of that, but the cost is notably higher yields than their big-company counterparts.”

China has encouraged the channelling of fiscal relief and bank credit to small businesses to aid the economic recovery from the coronavirus.

Credit support is part of Beijing’s plan to maintain employment and social stability next year, with a particular focus on smaller private-sector businesses, which employ most of the nation’s workers but have traditionally had limited access to bank credit. They were also hit the hardest by the coronavirus and have taken longer to recover.

Last week, China extended two credit-policy tools for its smallest businesses into next year, in its bid to consolidate its economic recovery and counter external changes.

China extends loan help for coronavirus-hit small businesses in bid to maintain economic recovery

Small businesses will be allowed to further postpone their principal and interest repayments on inclusive loans past the previous deadline of the end of March. Inclusive loans provide financial support for disadvantaged and low-income segments of society that may lack the financial history to be eligible for traditional loans.

But the China Beige Book analysis continues “to show a less-robust recovery than official statistics, which are in many cases being wildly inflated by downward revisions to their 2019 baselines”, according to CEO Leland Miller.

Telecommunications, shipping and financial services helped drive a recovery in services revenue, but chain restaurants and travel continued to lag behind, the report added.

Travel saw no growth over the last quarter, while hospitality posted the weakest revenues, the report said, pointing out that China’s official non-manufacturing purchasing managers’ index “has been boosted by its construction sub-index all year”.

Don’t confuse the fourth quarter’s services recovery with the ‘Chinese consumer is back’ narrative. This is a business services – not consumer-side – recovery

Shehzad Qazi, China Beige Book

China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – was 56.4 in November, above October’s reading of 56.2. Within the non-manufacturing PMI, the sub-index for the construction sector rose to 60.5 in November. A reading above 50.0 indicates growth in sector activity, while a reading below represents contraction.

“Don’t confuse the fourth quarter’s services recovery with the ‘Chinese consumer is back’ narrative,” said China Beige Book managing director Shehzad Qazi. “This is a business services – not consumer-side – recovery. Retail sector data bear this out even more clearly, with spending on non-durables sagging.”

The report also highlighted that goods prices, wages and other input costs have been rising since the second quarter, in contrast with the official measures of producer and consumer prices, both of which showed deflation in November.

China’s headline consumer inflation dropped into negative territory in November for the first time in 11 years, with the official consumer price index (CPI) falling to minus 0.5 per cent in November from a year earlier, from 0.5 per cent growth in October.

The decline in China’s producer price index (PPI), reflecting the prices that factories charge wholesalers for their products, slowed to minus 1.5 per cent in November from a year earlier, compared with the 2.1 per cent fall in October.

“Official data show consumer prices first decelerating, then staying almost flat for an extended period while the economy is supposedly starting to boom. Deflation appears to be a real risk – at odds, to some extent, with growth reports.

“But all three dimensions of [China Beige Book’s] price measurement – sales prices, wages and input costs – saw the expected reversal back to inflation in quarter two and further mild acceleration in quarter three before rising again in quarter four, albeit less quickly.

“Inflation is both less worrisome than official numbers and implies a more sensible economic trajectory.”

The China Beige Book International report was based on more than 3,400 interviews with company executives and bank staff in November and December.

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