Moody’s Expects Credit Trends of Chinese Corporates to Stabilise

Credit trends for Chinese corporates are likely to stabilise in 2013 because of the improvement in the domestic economy and the continuation of a benign liquidity environment, according to Moody’s Investors Service.

“We expect to take fewer negative rating actions on Chinese companies in 2013 than in 2012, as the revenues and earnings of most firms will recover. This view is based on expectations for gradual improvements in the fundamentals of some industry sectors, against the backdrop of our central macroeconomic scenario,” said Kai Hu, a Moody’s vice president and senior analyst and lead author of the report, entitled ‘Chinese Corporate Credit Trends to Stabilise on Improving Economy’.

According to the credit ratings agency’s (CRA) report, Moody’s central macroeconomic scenario now forecasts gross domestic product (GDP) growth for China at the current level of 7.5%-8.5% in 2013, up by 0.5 percentage point from its previous forecast, and in the range of 7.0%-8.0% in 2014.

“In addition, the liquidity environment will, as indicated, remain favorable, thereby supporting the refinancing and investment needs of rated Chinese companies,” Hu added.

Increased state-directed investments in infrastructure and the stabilisation of the property market have boosted the economic recovery in the mainland and have helped offset weak growth in exports.

These two factors will remain the major drivers of growth in 2013, directly benefiting companies in related sectors, such as property, steel, building materials and construction.

Issuers in these sectors – which faced the bulk of Moody’s negative rating actions on Chinese firms in 2012 – will see their revenues and earnings recover from the lows in seen 2012, said the CRA.

The government’s expansionary fiscal policies and its continued efforts to expand urbanisation will also fuel spending on infrastructure. At the same time, Moody’s expects property sales to grow in single-digit percentage terms in China, as developers shift towards mass-market housing to meet increasing demand.

Companies in the steel, building materials and construction sectors, which derive a high proportion of their revenues from infrastructure projects and property construction, will see a modest improvement in their revenues and earnings in 2013, although their financials will remain weak.

In addition, the increase in demand for construction-related commodities, such as steel and cement, will alleviate the pressure on selling prices and, in turn, lift the profit margins of those issuers exposed to this segment. The recovery will, however, be limited by lingering overcapacity problems in these sectors.

Moody’s also expects energy consumption in China to increase from 2012 levels, driven by the rebound in industrial output.

“The positive impact of the modest growth in property sales and higher infrastructure investment will filter down to energy-related industries, such as oil and gas, power utilities and mining,” said Hu.

Furthermore, a steady increase in domestic consumption will support sectors such as retail, consumer goods, TMT (telecom, media and technology) and autos.

The report also notes that investment-grade companies – mainly comprising state-owned enterprises – will continue to enjoy favourable access to the bank loans and capital markets, while the refinancing risk for high-yield companies will remain manageable through to 2016.

Nevertheless, many Chinese issuers share some broad risks in the near-to-medium term. These include:

  • Generally weak liquidity management and asset-liability structures, weak corporate governance, and low transparency.
  • Challenges and uncertainties associated with the reform and rebalancing of the Chinese economy.
  • Shifts in the global competitiveness of Chinese manufacturers as both wages and skills increase.

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