bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

SCMP Reporter

CHINA'S specialist banks may escape a downgrading by Moody's Investors Service, but the days of an assured credit rating are over.

  They can no longer assume that state ownership means a sovereign rating, with Moody's set to establish a new hierarchy of creditworthiness for the industry, according to Stephen Taran, Lehman Brothers' credit research manager.

  In February, Moody's put the A3 credit rating of four mainland banks on review. The company confirmed the country's A3 sovereign rating. If the threatened downgrade occurs, the idea of a homogenous rating for mainland banks will be scotched.

  Mr Taran believes that on this occasion the Bank of China (BoC), Industrial and Commercial Bank of China, People's Bank of China, and the Bank of Communications will keep their credit ratings intact.

  But Moody's would require an unambiguous commitment from Beijing to provide the banks with liquidity and preserve their fundamental solvency, he said.

  That would be given despite recent comments from Ministry of Finance officials that Beijing wanted government guarantees of state firms' debt kept at arm's length.

  When announcing its review, Moody's said of the four banks: 'There is a long list of challenges and uncertainties that could undermine the credit quality of banks.'   The Bank of Communications - which is controlled by the Shanghai government and so viewed as a higher credit risk than the centrally owned banks - was the most likely to lose its rating, said Mr Taran.

  Moody's review comes as foreign creditors are ditching the long-held view of a 'China Inc' when assessing the credit risk of state-owned enterprises and as the slow devolution of banking control from Beijing continues.

  It also precedes China's inevitable economic slowdown, which will increase the level of non-performing loans, currently estimated conservatively at 10 per cent by Beijing.

  Mr Taran said Moody's was concerned that the aftermath of the post-boom era would damage bank balance sheets, particularly as property values were falling sharply.

  The major issue of the review was the relationship between central government and the banks.

  The old banking adage of being 'too big to fail' held true in China, since a collapse of any single institution would lead to a destabilisation of the country's entire financial system.

  'In short, if any of these three institutions [central government-owned banks] failed, the Government would have to create another bank to replace the failed institution,' he added.

  The Government would guarantee unconditional credit to repay the three banks' debt in the case of possible default, the crucial issue in maintaining their current A3 rating.

  Also in the banks' favour was their concentration of liabilities to state-owned enterprises and the People's Bank of China, the country's central bank. In a crisis these could be rolled over, and even increased, to allow repayment of foreign liabilities, he said.

  Moody's said the Government's budgetary problems - likely to worsen in an economic downturn - limited its ability to recapitalise the banks directly in the event of a crisis.

  Mr Taran agreed, but said alternative methods of fund-raising, such as a government-backed domestic bond issue, could shore up their balance sheets if needed.

  Commentators tended to over-play the non-performing loan issue at state-owned banks, and even if economic growth slowed to eight per cent the effect on the sector would not be as bad as a fully fledged Western-style recession, he said.

  The wild card was the possibility that Moody's might confirm the BoC's rating while downgrading the rest. Being China's flagship foreign exchange and export lending bank, it could be the one to get special treatment, said Mr Taran.



Chinese banks face rougher ride from rating agency