asia

China's state-owned enterprises and local governments face 'much tighter credit,' economist predicts


SINGAPORE — The Chinese economy enters 2021 following a strong bounce back from the coronavirus pandemic and Deutsche Bank’s Michael Spencer predicts that deleveraging will return as a focus for the country’s authorities.

“One of the key concerns that investors domestically and abroad have had about China over the last few months is the growing number of defaults,” Spencer, chief economist and head of research, Asia-Pacific, at the bank, told CNBC’s “Squawk Box Asia” on Monday.

“I think what we’re going to see in 2021 … is a return to deleveraging as an important explicit objective of the Chinese government,” he said. “I think what you’re going to see is … much tighter credit to local governments and to state-owned enterprises.”

A series of recent high-profile defaults by state-owned Chinese firms spooked investors and raised questions over the state of the country’s credit market. These government-supported enterprises were previously seen as safer investments because they rarely defaulted.

Defaults are expected to rise, Spencer said, adding that credit risk in China will become “increasingly important” both for foreign as well as domestic investors.

That, however, may not necessarily be a bad thing.

“This is something that, you know, we have wanted for decades,” Spencer said. “It’s something that China needs — a more sensible approach to lending, a greater credit discipline … and more market discipline over companies.”

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