Fitch Ratings warns that China corporates face mounting demand & supply challenges

Fitch Ratings has published in a recent update that the ''near-term pressures on profitability are increasing for Chinese companies in a number of sectors.''

This comes as the People's Bank of China somewhat surprised markets by leaving rates on hold today at the interest rate meeting and set the yuan at a lower than expected rate.  

''Domestic and external consumer demand faces headwinds, even as supply chains within China are challenged by wide-ranging restrictions on movement designed to counter the spread of Covid-19 cases,'' Fitch Ratings wrote. 

The rating agency goes on to report:

''As of mid-April, pandemic-related public health restrictions affected all but 13 of the top 100 cities by GDP, according to research firm Gavekal, with a number of large regions such as Shanghai and Jilin facing full lockdowns for parts of March and April. These measures have added further challenges to policymakers’ efforts to stabilise economic momentum, after the emergence of housing-sector strains from mid-2021 that led some developers into distress.''

''Dented consumer confidence was evident in a quarterly survey released at end-1Q22 by the People’s Bank of China. This showed urban residents intended to reduce spending and investment, despite improved perceptions about household income and employment. It indicated that households intend to cut discretionary spending, focusing instead on essential items, education and healthcare. Retail sales also fell YoY in March.''

The agency now projects that China's retail sales growth to decelerate to mid-single digits in 2022 from 12.5% in 2021, given weaker consumer sentiment, the impact of lockdowns and the high base effect for 1H22.

Fitch notes that ''Demand pressures have been accompanied in recent weeks by an increase in supply chain problems associated with movement restrictions. Several companies have reportedly halted production owing to difficulties in transporting inputs and finished products.''