China Sector report
Sectors @ a glance
Industry performance outlook
Construction/ Const. Materials
The arrows in this overview represent the direction of change in the Atradius outlook for the industry since the previous update. No arrow will appear if there has been no change in our overall outlook.
Remains Excellent China is the world’s largest importer of agricultural products. The sector has been only partially impacted by lockdown measures in early 2020 (e.g. transport and supply chain issues). Agricultural imports are expected to increase further in 2021, and sector value added is forecast to grow by about 4.5%.
Remains Poor Both automotive production and sales started to rebound in Q2 of 2020 due to government stimuli and large discounts by manufacturers and dealers. Mainly due to the sharp decline in Q1, automotive added value is expected to grow only 1% in 2020, followed by an 8% increase in 2021. In the January-July 2020 period, automotive production and sales still contracted 3% and 2.9% year-on-year. That said, among commercial vehicles, the truck market recorded a sales increase of 24%. In the electric vehicles department, sales increased 3.9% year-on-year. However, loss making and heavy reliance on funding are still common problems for electric vehicle companies.
Overdue payment cases have decreased as the automotive market has rebounded. However, the overall payment period in the industry still remains quite long. Car producers still pay suppliers slowly, usually with longer payment term and an acceptance bill with 3-6 months maturity. This adds additional pressure to the margins and capital base of smaller and/or private-owned suppliers. Low-cost manufacturers that currently produce basic parts are particularly expected to leave the market. Small car dealers recorded slim margins due to discount rates needed to stimulate sales after the slump in Q1 of 2020.
Remains Fair Chemicals added value is expected to grow 7% in 2021 after a 2% increase in 2020. Benefitting from the improving market condition, the petroleum and chemical sector continued to show stable recovery in Q3 of 2020. In Q1-Q3 of 2020, the reduction of revenues and profits were narrowed to 10.5% and 40.5% respectively, compared to 11.9% and 58.8% in H2 of 2020.
Pharmaceuticals added value is expected to grow 10% in 2021 after a 4% increase in 2020. Manufacturers of raw materials for the production of vaccines and cell-therapy drugs, as well as those investing in medical institution services, can now access preferential treatment, such as tax incentives, streamlined procedures or discounted land prices. In the long-term the government will further increase investment in the pharmaceutical sector, and encourage domestic businesses to increase their R&D expenditures and improve their innovation ability.
Remains Poor The severe economic downturn in Q1of 2020 has led to higher payment defaults of private-owned and smaller players, as their working capital was not sufficient during the lockdown period. Several smaller construction businesses have filed for bankruptcy in 2020.
The sector has benefited from government stimulus measures, and more infrastructure investments are expected in 2021. Construction added value is expected to grow 11% in 2021 after a 3% increase in 2020. However, the credit cycle of this industry still remains very long, and large construction companies habitually pay slowly. Therefore, some prudence is advised when dealing with this sector.
Remains Fair Retail added value is expected to grow 12% in 2021 after a 2% contraction in 2020. In Q1 of 2020, private consumption of non-food consumer goods sharply deteriorated due to the coronavirus impact, with many businesses temporarily closed due to the lockdown. While retail sales decreased 19% in Q1, they have since rebounded. Online sales increased by 9.7% in the period of January-September 2020. While the number of payment delays increased in the industry in Q1 of 2020, the payment behaviour has improved again since Q2 of 2020. It has meanwhile resumed back to normal levels seen before the coronavirus outbreak.
Remains Fair Commercial ICT demand suffered in Q1 of 2020, but it has bounced back since Q2. In line with the rebound of the whole ICT industry since Q2 2020, revenue growth of ICT manufacturers quickly resumed. In Q3 of 2020, shipments of PCs and tablets grew 10% year-on-year. ICT value added is forecast to increase 16% in 2021 after a 9% growth in 2020.
The Chinese ICT market is expected to reach a value of USD 711 billion this year, as a result of increased "new infrastructure" construction and 5G adoption. 5G, AI, IoT, ICloud, etc. remain promising segments, characterized by innovative technology, high demand and high entry barriers.
At the same time, a further escalation of the Sino-US trade war poses a substantial downside risk to the Chinese ICT industry, given the heavy reliance of the sector on export sales and imported technology. The impact of US sanctions imposed on Chinese ICT companies would be different along subsectors. Businesses requiring high-tech key components (e.g. semiconductors and chips) would face difficulties in easily substituting US technology. In the 14th five-year plan (2021-2025), China aims to build an internal economic ecosystem less prone to external sanctions, which marks a shift in priorities towards industrial and national security, as well as reduced technology imports. It is believed that ICT will benefit from increased public investment in R&D in order to decrease the dependency on the US.
Remains Excellent With the spread of coronavirus under control in China and the ongoing economic rebound, China’s banking system can prevent a large build-up in credit risks by actively recognizing and resolving bad loans. Despite some pressure on profitability, it is expected that asset quality will remain stable. The quality of loans to the high-risk, small business segment seems to be improving, as the non-performing loan ratio to small businesses has declined to 2.99% in H1 of 2020, down from 3.22% in 2019.
Remains Good Food added value is expected to grow 10% in 2021 after a 3.5% increase in 2020. In Q1 of 2020, the coronavirus outbreak and subsequent control measures significantly disrupted China’s food and beverage sector. However, these effects were short lived. In Q3 of 2020, total sales from listed companies in the food and beverage sector increased by 10%, with a 13% increase in net profit.
As a consequence of the past lockdown, demand for frozen and convenience food has increased. However, it is worth noting that Chinese consumption of imported frozen foods is affected by continuous reporting of coronavirus on imported frozen food packages. The pandemic has also triggered two significant trends in the Chinese food industry for the immediate future. First, fresh food e-commerce has become popular, since people increasingly tend to eat at home. Second, due to increased health concerns, demand for healthy foods like nutraceuticals is expected to increase significantly.
Remains Fair Engineering added value is expected to grow by more than 4% in 2021 after a 3% increase in 2020. In the period of January-October 2020, both revenues and profits grew above average compared to other industries. Thanks to the recovery and start-up of infrastructure investment and energy construction-related projects, production has rebounded rapidly for construction machinery, power generation, and power transmission and transformation products. Production also recovered quickly for some agricultural machinery products. Automotive-related machinery production has continued to stabilize.
Remains Bleak Metals added value is expected to grow 7% in 2021 after a 5% increase in 2020. However, excess capacity was already a major issue before the coronavirus outbreak, with many businesses being highly indebted and experiencing very tight operating margins.
High-end copper and aluminium demand has increased, and this is expected to continue in 2021 and 2022, as more projects will be under construction (e.g. a high-speed rail, 5G network stations, ultra-high-voltage power transmission). However, the demand for low-end copper and aluminium could still be weak. In addition, increasing raw material prices (especially on copper) could put more pressure on the profitability of businesses.
The credit risk situation of many private-owned metal producers will remain challenging, as higher commodity prices will further squeeze their profitability. For businesses dependant on infrastructure construction projects, the average collection periods are usually relatively long.
Remains Poor Paper producers were impacted by decreased demand due to the lockdown measures in early 2020, lower growth and the ongoing digitalization. Mainly affected were the printing paper and packaging paper segments, while the performance of household paper has been relatively stable, as people spend more time at home. The sector is impacted by overcapacity, fierce competition and working capital pressure for many businesses. Additional environmental restrictions and structural changes to demand could lead to further industry consolidation.
Remains Poor Due to the comprehensive lockdown measures in early 2020, many segments suffered heavily, especially hotels and catering, restaurants, bars, entertainment and cultural events, travel agencies and tour operators. Hotels and restaurants have gradually reopened since March 2020. Meanwhile, stimulated by the recovering tourism industry, hotels and catering started to pick up. However, the negative impact from the pandemic cannot be offset easily. In 2020 tourism revenue amounted CNY 4.55 trillion – a 20.6% year-on-year decrease. Hotel and catering added value is expected to contract 22% in 2020, with just a 12% rebound in 2021.
Remains Bleak Excess capacity was already a major issue for the steel industry before the coronavirus outbreak, with many businesses being highly indebted and experiencing very tight operating margins. The majority of private Chinese metals and steel traders do not have sufficient fixed assets, thus suffering from slim margins and very limited bank facilities.
Steel added value is expected to grow 7.5% in 2021 after a 4.5% increase in 2020. The sector has benefited from infrastructure investments and the rebound of automotive production. However, in the period of January-October 2020, profitability shrank 4.5% year-on-year, while competition remains fierce in the industry. While leading state-owned steel makers still show some resilience, many private-owned steel and metals producers and traders face serious trouble.
Remains Poor Producers already suffered in 2019 from overcapacity, fierce competition and working capital pressure. Wholesalers and retailers have been negatively affected by changes in customer behaviour and increased competition from new online retailers. Their performance further deteriorated in early 2020 due to the lockdown.
There has been a moderate rebound since Q2 of 2020, due to the economic recovery and returning orders from India and Southeast Asia (where textile manufacturing was impacted by the pandemic). However, despite this positive trend, the market situation remains challenging. In the period of January-September 2020, about 29% of textile companies experienced losses. Market confidence remains weak, as fixed asset investment decreased 20% year-on-year.