China's recent slowdown and property crisis have prompted talk that it is on the verge of a "lost decade." We do see some similarities between China's situation and the economic stagnation in Japan after the latter's property bubble burst in 1991. However, S&P Global Ratings believes China can avert this outcome, helped by regulatory action and the strength of its banking and corporate sectors.

Chinese banks are well-positioned to withstand the impact of the country's economic slowdown. The government's restrained response suggests policymakers have learned from Japan's experience. It also has a competitive manufacturing industry, with strengths in emerging sectors such as electrical vehicles (EVs) and renewable energy. All these factors will help keep China from falling into prolonged growth traps seen in other emerging markets.

We conveyed these views in our China Credit Spotlight Conference held on Oct. 19, 2023. The two featured panels sparked lively discussions: "Risks After China's Recovery" and "Resilient Sectors Under Coming Headwinds."

Questions asked by the audience, and moderators, include:

• Will China see a Japan-style "lost decade"?
• Can China avoid the "middle-income trap" of emerging markets?
• On which sectors are investors focusing?
• Which sectors will do well next year?
• Which sectors will be supported by policies? What key risks do they face?

A replay, slides and other materials related to the webinar are available here. We will shortly follow up with a second FAQ-style commentary based on the same event, which looks at some of the pitfalls facing the Chinese economy.

Frequently Asked Questions

Will China experience a Japan-style "lost decade"?

Sovereigns (KimEng Tan):  This depends on the government's response to the current situation. If Chinese policymakers learned from Japan's experience, they may take actions that lead to a different outcome.

Japan went through a long period of slow growth and very low inflation. For 10 years after a property bubble burst in 1991, Japanese banks were shrinking their loan books. This had a very negative impact on the economy.

Compounding this was the government's push to spur growth with infrastructure spending. At the time, Japan already had a modern and comprehensive public infrastructure. Spending a lot more to add to it did not substantially improve the country's growth potential, it just drove Japan's public debt levels to one of the highest in the world, which further depressed sentiment.

China is not anywhere near that situation. Partly due to the early actions of regulators, the country's banking system today is not in as bad a shape as right after Japan's property bubble burst. Also, China's policymakers remain vigilant against over-expansion of credit in the country's most troubled sectors, namely, real estate, and local governments.

Lastly, instead of spending heavily on infrastructure just to boost growth, Beijing continues to rein in the uneconomic projects of local governments, as many of them are already heavily indebted.

These policies differentiate China from Japan's early response to its property crash. If the Chinese government can continue to address structural issues quickly, prevent excessive reliance on policy stimulus, and maintain the confidence of the private sector and the economy, the country should not see a prolonged period of stagnation like the one Japan experienced.

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Chart 2

Can China avoid the "middle-income trap" of emerging markets?

Economics (Louis Kuijs):  Aside from restoring confidence and addressing the structural problems of the property sector and the local governments, China has areas of strength that could be leveraged and further developed to help its long-term growth.

First and foremost, China's strength will remain manufacturing. The sector is fundamentally competitive. The country has many strong firms in the global marketplace that are supported by a lot of innovation occurring domestically. Sectors such as electric vehicles (EVs) and EV batteries come to mind.

Over the longer term, China will be able to raise efficiency and avoid the "middle-income trap," unlike many other emerging markets. One of its main challenges ahead is consumption--China simply needs more of it to push forward on its economic transition.

On which sectors are investors focusing?

Investor view (Angus Hui, Fullerton):  Investors are looking at Macao gaming. Mass-market gross gaming revenues in Macao have already exceeded pre-COVID highs. Issuers' balance sheet liquidity has largely normalized, and their license overhang issue is now behind them, allowing for greater visibility on capital expenditure in the coming years.

The sector also has good beta sensitivity to China growth. It has more than 20 sizable, liquid bonds totaling over US$20 billion in market capitalization, with an average yield of 8%-9%, by issuers ranging from investment grade to single 'B'. These factors allow for relative-value views and attract attention from global investors.

Other areas that are drawing investor interest, but without many U.S. dollar bonds, include EVs, new energy, life science, and advanced manufacturing. Of these, EV firms are perhaps the most likely to issue debt capital in dollars, despite getting most of their funding domestically. The sector has strong public and private backing, a one-third global market share, and will likely see growth from exports to Southeast Asia and Europe.

The key EV players are quite different in terms of their brand, credit quality, pricing, and technological competitiveness. They may fare differently under headwinds such as over-capacity and European anti-subsidy investigations. Active management and fundamental analysis can add value by identifying potential winners and losers.

Which sectors are doing well this year, and which will do well next year?

Consumer products, travel, and catering (Sandy Lim):  Smaller-ticket luxury products such as premium food and beverage, cosmetics, and electronics are doing quite well. Trends that began before the pandemic are also helping. For example, the rise in pet ownership has driven demand for pet products, while an ageing population and a rising health awareness have translated into demand for adult nutrition products.

Domestic travel is also doing well, with volumes already returning to pre-COVID levels by the middle of 2023. Chinese travelers have become reluctant to travel outside the country, first because of COVID concerns, but now due to economic uncertainties that are encouraging lower-cost domestic trips. This trend has coincided with the launch of projects that have raised the appeal of destinations across China. Hainan, for example, has become a retail and entertainment destination, thanks to sizable local and international investments.

Lastly, in catering, revenues have grown 19% this year. While the gains are against a low base set last year, growth should remain a healthy 6% in 2024--higher than our baseline Chinese GDP growth of 4.6%. Dine-in markets will likely normalize by year-end, but the delivery market should still see double-digit gains in 2024, as it continues to benefit from a shift in preferences for home deliveries that set in during COVID.

Electric vehicles (Claire Yuan):  EVs are strong both in terms of domestic sales and exports. Domestic sales rose about 30% in the first nine months of 2023. We expect a further 15% growth in 2024, supported by price cuts, better product offering, and supportive government policies. For exports, the momentum is even stronger. China's EV exports doubled in the year to date due to cost advantages and rising product competitiveness. Sales growth will slow next year against the high base set this year.

Infrastructure and utilities (Christopher Yip):  Infrastructure has been quite resilient due to steady credit quality, rebounding mobility and travel, and strong government backing. Last year, the government spent Chinese renminbi (RMB) 3 trillion, or 17% of GDP, on infrastructure including power, transport, and public facilities. State-owned enterprises (SOEs) with policy roles are typically key issuers in the sector. The entities are important levers for growth, and they help execute the government's other priorities.

The outlook for China's power generators is a story of steady power demand, accelerating investments, and supportive policies. The sector benefits from the government's "dual carbon" goal and its push for energy security. Coal-fired generators, which still produce over half of China's power, are also seeing their profitability recover. Power tariffs rose 2% this year while fuel costs fell 20%.

Such trends have driven a profit rebound among power producers, helping to offset the burdens of renewable investments. As a result, funds from operations to debt ratios will rise by 2.3 percentage points (ppts) this year, and another 0.6 ppts next year, from last year's 9% level.

Structured Finance (Jerry Fang):  Retail asset-backed securities (ABS) have been performing well this year. Auto loan ABS, for example, have seen 60-90 day delinquency rates falling to 0.07% from 0.10%. Consumer finance ABS has also seen strong issuance, due to more first-time issuers and rising originator funding needs.

The regulators have been improving the transparency of securitization procedures, which sped up issuance and provided more visibility for offshore investors. As the government aims to support consumption and the EV industry, we expect more ABS issuance backed by consumer loans and EV auto loans.

Which sectors will be supported by policies? What are the key risks?

Consumers (Sandy Lim):  Policymakers have extended limited support to consumer sectors. The government issued consumption vouchers, but these were too small to form a material part of consumer spending. For consumers to spend more of their savings, people need to feel secure. That sense of confidence can only be raised through macro policies, such as initiatives to stabilize the property sector and boost employment.

Infrastructure and utilities (Christopher Yip):  These sectors have always received policy support. This support will continue or even strengthen as the government seeks to stimulate growth and to meet critical policy goals such as energy security and decarbonization.

Key risks are largely exogenous to the sector. For example, a major economic slowdown may lead to much lower growth in power demand than our projected 4%-5% annual expansion over the next few years. This rate of increase is already lower than the 5%-6% growth we've seen so far this year, and much lower than the double-digits we used to see. Fuel costs may also rise on the back of geopolitical risks, which will weigh again on profitability, particularly for thermal-heavy generators.

Electric vehicles (Claire Yuan):  EVs are not likely to see additional support, given the government has been providing stimulus for years. China's EV penetration rate now is above 30%--far higher than the official goal of 20% by 2025. As a result, previous support is being gradually phased out to make the industry more market oriented. Policymakers have cut purchase subsidies over the past few years, and completely removed them in 2023. Over coming years, they will also remove the exemption for EVs on the 10% tax chargeable on the total price of the car when buying new vehicles.

Automakers transitioning to EVs will be hit by the lower margins of those vehicles, stemming from the high cost of batteries. This remains a key risk to those producers that are on a fast track to electrification. Improving product offerings and ramping up EV sales will help them gain economies of scale and defend their profitability.

Pure EV makers, especially start-ups, are more vulnerable. Some of them are loss-making at the gross margin level and have been burning cash for years. Their liquidity will be tested if market sentiment weakens.

On exports, intense competition at home is driving more players to sell abroad. Trade hurdles are emerging, such as the anti-subsidy probe in Europe. This may lead Chinese firms to set up production and distribution capabilities in Europe and emerging markets, further raising investment and execution risks.

Related Research

• Economic Outlook Asia-Pacific Q1 2024: Emerging Markets Lead The Way, Nov. 17, 2023,
• China's Coal Power Producers Will Benefit From Tariff Reform, Nov. 14, 2023
• China Securitization Performance Watch 3Q 2023: Consumer ABS Burgeoning Amid Lackluster Issuances, Nov. 13, 2023
• China Retail: Tighter Belts, Broader Defenses, Oct. 17, 2023
• China Auto: Soft Demand Heightens Competition, Oct. 10, 2023