China faces slower growth and rising NPLs

China is heading for slightly slower GDP growth than in 2014. In the current slower-growth period, increasing non-performing loans (NPLs) are expected to seen as a consequence of past excesses in credit growth, says Standard Chartered. China has, for the last few years, topped its Asian peers in this area of concern. The five-year average of credit growth minus nominal GDP growth is above 700bps. This may be well down from the highs, but the threshold for raising a red flag is 500bps. This implies that China now has less room to employ credit growth to boost GDP growth, as NPLs from its most recent credit growth excesses are yet to be fully recognised, added Standard Chartered. 

The Chinese government's tolerance for genuine defaults prepares the ground for greater credit differentiation in the onshore credit market. Meanwhile, the government is expected to use its available resources to avoid mass defaults, as containing systemic risk is one of its priorities, states Standard Chartered. The announced doubling of the local government debt swap programme to CNY 2tn effectively eliminates refinancing risks for local governments this year. However China's Ministry of Finance is also clear in its message that China will not be using local government financing vehicles to support the economy.