China's Credit Crunch Bites in Q3

The long-predicted credit crunch in China has well and truly arrived, according to new findings from ACCA (the Association of Chartered Certified Accountants) and the Institute of Management Accountants (IMA) in their Global Economic Conditions Survey (GECS).


GECS, the largest regular economic survey of accountants in the world, gauging the views of ACCA and IMA finance professionals globally, revealed that respondents in China reported the tightest supply of growth capital in at least two years, suggesting that the country's official and shadow banking sectors are taking a significant hit. In response, business investment in capital and staff has fallen sharply throughout China.


"In early 2013, GECS findings indicated that China had avoided the 'hard landing' analysts had predicted for the past two years," says Emmanouil Schizas, ACCA Senior Economic Analyst. "However, China's problems are far from over. Credit rationing and fears about private and public sector debt have continued to damage the Chinese recovery and the crunch appears more prevalent on the mainland, while businesses in Hong Kong still appear to have reasonable access to growth capital."


Schizas adds the credit crunch has also put pressure on demand and cash-flow, which started to falter in the second quarter of 2013, first in Hong Kong and now in the mainland.


The knock-on effect of the challenging business environment was being felt in China's business community.


"As a result of these pressures, business confidence has been falling throughout China over the last six months, with concerns accelerating in the third quarter of 2013," adds Jane Cheng, head of ACCA Hong Kong.


Only 20% of respondents in the mainland and 5% of those in Hong Kong reported confidence gains in Q3. Although respondents in the mainland have been consistently more confident than their colleagues in Hong Kong, their views may soon begin to converge.


"However concerned they might be for their own organisations, Chinese finance professionals are telling us they are optimistic about the country's economic recovery and the authorities' ability to respond to challenges. Following a sudden deterioration in the second quarter of 2013, perceptions of the recovery are clearly on the rise again in mainland China, while respondents in Hong Kong have recorded a full year of improving perceptions."


GECS revealed that overall, 40% felt that the economy was improving or about to do so, up from 36% in the second quarter, and 52% felt that conditions were deteriorating or stagnating, down from 60% previously.

However, ACCA and IMA warn that this optimism could prove short-lived if China's credit crunch persists beyond the fourth quarter of 2013.

Global outlook

Collectively, across the world businesses were more optimistic about the economy than they've ever been since the survey was launched, and more confident about their own prospects than at any time since the end of 2010. However, a closer look at the figures reveals that many individual markets did not share this buoyant mood and saw business confidence fall in Q3.


The threat of the Federal Reserve and other Central Banks halting or reversing their extraordinary stimulus has led to a dramatic withdrawal of investment from riskier assets, as well as most emerging markets.


The survey findings suggest that the fallout has fed through to the real economy, sending many of the world's most promising economies into a credit crunch of their own.


This timing is particularly unfortunate as it coincides with a deep credit crunch in China, resulting from concerns about the health of the country's banking sector and the viability of its public finances.


The GECS shows that monetary policy, real and potential, has now become a stronger influence on business confidence than demand or business opportunities.


"That's a sure sign of trouble brewing. The idea of a global recovery has taken hold worldwide and the business community is generally optimistic about macro-economic developments even as they doubt the prospects of their own organisations. This is not really sustainable - and it is more likely that recovery expectations are going to re-align themselves with that low business confidence, than vice versa," says Schizas.


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