S&P warns China’s corporate credit levels expected to climb
Ratings agency says credit quality deteriorating more quickly than at any time since 2009
China’s corporate credit levels are expected to rise this year, as its economy continues to slow, according to a latest report from S&P Global Ratings.
The country already has the highest corporate leverage of any industrial nation, with an average debt-to-GDP ratio of about 160 per cent.
But Christopher Lee, a credit analyst at S&P, is now warning that China’s credit quality is “deteriorating more quickly than at any time since 2009”, with S&P’s negative rating actions exceeding the positive rating actions by 3:1 in the first half of 2016.
The report expects Chinese corporates to “come under increasing strain as economic growth slows, industrial overcapacity crimps profitability and cash flow, and an elevated appetite for expansion weakens leverage”.
According to the S&P study, just one firm, China Fishery Group, a unit of Hong Kong’s Pacific Andes International which is Singapore-listed, defaulted in the first six months.
The company, which S&P described as a repeat defaulter, filed for chapter 11 protection in US Bankruptcy Court in New York along with more than 15 affiliates last month.
Lee, however, said that China Fishery was “an aberration, given the sharp deterioration in credit risks in our rated portfolio ...to a critical level for some corporate credit issuers”.
“Any weakening of the currently favourable funding environment could push them over the edge,” he said.
Last year, six issuers defaulted, according to S&P, representing 2.5 per cent of the number of total rated corporate issuers in Greater China.
Defaults in some industries including mining, building materials, and real estate, had been widely anticipated, it said, due to the sharp drop in commodity prices and correction in the real estate market.
All of those expect one issuer, Renhe Commercial Holdings, defaulted because of missed payments on interest or principal amounts.
[Moody’s has now changed its outlook for Renhe Commercial’s corporate family rating to stable from negative, after Renhe announced earlier this month it had completed the disposal of its underground shopping malls in China to Apex Assure.]
Lee said in his report that the pressure on profitability, cash flow, and leverage remains high, despite cost-cutting, reductions in capital expenditure, and industrial demand expecting to stabilise in the second half of the year.
Financing conditions remain supportive of refinancing in its rated corporates, he added, but those favourable conditions could turn around this year because lenders have become increasingly cautious towards highly indebted borrowers in certain sectors and provinces.
“The perceptions may be shifting that the companies will have implicit support from the central or local government, due to rising credit costs,” he added.
“The current conditions may push more corporates to default in the bond market, potentially creating mini credit crunches.”
Recent signs of weakening investment have added to the gloomy outlook for the slowing China economy, despite second quarter growth of 6.7 per cent, unchanged from the first quarter’s pace.
Investment from the private sector and real estate both continued to lose steam, while data on retail sales and industrial output were better than expected, the National Bureau of Statistics reported last Friday.
Catherine Cheung, head of investment strategy and portfolio advisory at Citibank global consumer banking, expects China’s GDP growth to fall to 6.2 per cent in the second half and its full-year growth to be 6.4 per cent.
“The direct negative impact of Brexit on China’s economic growth is limited, expecting to drag its GDP growth down 0.1 per cent,” said Cheung.
“However, China cannot avoid to suffer a longer term strike if Brexit deeply worsens the global economic growth outlook.”