China Economy

China has stimulus ammunition, says S&P

Ratings agency says high savings rate means there is plenty to support government spending

PUBLISHED : Friday, 02 November, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm

Beijing still has plenty of ammunition for stimulus measures, but some companies and banks face considerable risks, according to recent reports by ratings agency Standard & Poor's.

"China has plenty of powder left in its stimulus keg," one report by Tan Kim Eng, a senior director, said.

"Some observers argue the damage of the last economic stimuli had saturated the banks with credit risk and exhausted local governments' ability to finance large projects. Standard & Poor's Ratings Services thinks this is unlikely."

The mainland had a big financial cushion, owing to its high savings rate, Tan said, adding that the central government could support local government and there remained much demand for infrastructure.

However, inefficient infrastructure spending could lower GDP growth and hurt the government's efforts to rebalance the economy because stimulatory spending would expand the state sector and reduce domestic consumption, Tan said.

Another S&P report, by Liao Qiang and Ryan Tsang, warned the government's 4 trillion yuan (HK$4.97 trillion) stimulus from 2008 to 2010 had hurt the mainland banks' balance sheets, and the damage was about to surface.

"A credit downturn is unfolding in China's banking industry. Corporate delinquency is rising. Net interest margins are tightening. Liquidity management is becoming increasingly strained. Standard & Poor's believes these combined forces will seriously test the resilience of Chinese banks," they said.

The biggest mainland banks would find it tougher to maintain adequate levels of profits as economic growth slowed and credit losses soared, Liao and Tsang said.

"The financial profiles of China's largest companies are on average relatively weak," another S&P report said.

In the agency's survey of 107 large mainland firms, most rated between four and six , where one indicated the least financial risk and six pointed to the most financial risk.

Firms with a score of six included Air China, China Cosco, China Shougang and three companies linked to the development of Tianjin.

"Generally, the profitability of the top Chinese companies declined from 2009 to 2011. Given continued economic deterioration in 2012, profitability was likely to have fallen further," the report said.