Monetary stimulus in China currently is one third of that in 2009-10. According to our forecasts, more than 3/4 of monetary easing for this year has already been implemented. As the economic recovery is on track, the PBOC is likely shifting from a proactive to a wait-and-see stance.

The ongoing credit easing amid the Covid-19 shock will worsen banks’ asset quality. We estimate that by the end of 2021, ‘problematic’ loans  could increase by +124% (+RMB7.7tn) compared to the end of 2019. We find that recapitalization tools available to banks (e.g. perpetual bonds, central government special bonds, profit concession) are enough to cover potential losses incurred by these problematic loans. The financial de-risking campaign launched in 2017 managed to improve China’s overall bank asset quality and reduce systemic risk, making a systemic event unlikely in the short term. That being said, individual non-systemic failures among smaller city-level and rural banks, like in 2019, are still likely.

What does this mean for companies? While we expect GDP to come back to its pre-crisis level in early 2021, and GDP growth at +7.6% for the full year, we forecast insolvencies to increase by +40% over 2020-21 v. 2019. Deteriorating credit quality will significantly push the number of zombie companies higher, mainly in the automobile, textile and agrifood sectors. These sectors have seen declining profitability and rising indebtedness since 2015.