Hong Kong, June 13, 2017 -- Moody's Investors Service says that economy-wide leverage in China
(A1 stable) will rise further over the coming years, given the need
to maintain policy stimulus to achieve targeted robust growth levels.
In particular, spending by government and government-related
entities — including policy banks and state-owned enterprises
— will increase.
"China's financial strength will erode gradually over the coming years,"
says Michael Taylor, a Moody's Managing Director and Chief Credit
Officer for Asia Pacific. "While ongoing progress on reforms
will likely transform the economy and financial system over time,
it will not prevent a further material rise in economy-wide debt,
and the consequent increase in contingent liabilities for the government."
Nevertheless, Taylor points out that the strengths of China's
credit profile will allow the sovereign to remain resilient to negative
shocks, with GDP growth likely to stay strong as against other sovereigns,
still considerable scope for policy to adapt to support the economy,
and a largely closed capital account.
Taylor was speaking ahead of a series of conferences in China hosted by
Moody's and its Chinese affiliate, China Cheng Xin International
Credit Rating Co. Ltd. (CCXI). The conferences are
titled: "Moody's & CCXI 2017 Mid-Year China
Credit Outlook Conference: Sustainability of China's Economic and
Credit Trends: Implementation and Implications of Reforms."
At the conference, analysts from Moody's and CCXI will discuss China's
macroeconomic landscape and its state-owned enterprises,
as well as the outlook for the banking, corporate and structured
finance sectors.
Moody's & CCXI explain that while China's GDP will remain very
large, and growth will stay high when compared with other sovereigns,
potential growth will likely fall in the coming years. And,
the government's direct debt burden will rise gradually towards 40%
of GDP by 2018, and closer to 45% by the end of the decade.
On the banking sector, Moody's says that reforms in the shape
of regulatory actions in China are credit positive for the banks —
because, for instance, they reduce the interconnectedness
of financial institutions and improve the transparency of asset risk —
but they also pressure the banks' liquidity and profitability in
the short term.
And, in the life insurance sector, systemic risks are rising
because of the insurers' increasing exposures to risky and lumpy
assets, as well as their rising surrender rates as well as liquidity
and asset-liability mismatches.
As for the structured finance sector, Moody's points out that issuance
volumes are increasing, and that ratings for structured transactions
are closely linked to the credit quality of related Chinese financial
institutions or regional and local governments (RLGs). On Chinese
auto loan asset-backed securities, in particular, Moody's
says that delinquency rates for these transactions have stayed low,
reflecting the overall good performance of the auto loans backing the
deals.
"On the government's moves to prevent the RLGs from borrowing
through local government financing vehicles, despite the increasing
restrictions on the RLGs in supporting their local government financing
vehicles, upper-tier RLGs will likely continue to provide
support, in cases that could trigger national- or regional-level
systemic risk and undermine the social fabric of the country,"
says Ivan Chung, a Moody's Associate Managing Director.
Moody's & CCXI 2017 Mid-Year China Credit Outlook Conference,
with the theme "Sustainability of China's Economic and Credit Trends:
Implementation and Implications of Reforms" takes place in Beijing
on 13 June, Shanghai on 15 June, and Shenzhen on 20 June.
Related research may also be found through Moody's topic page "China's
Trilemma: Growth, Reform and Stability", available at
http://www.moodys.com/chinarebalancing. This
page provides a centralized source for Moody's research related to key
credit issues in China as the country's macroeconomic story continues
to unfold.
Recent Moody's publications relating to China's Trilemma include:
• China's Guidelines for Land Revenue Bonds Are Credit Positive for
Local Governments
• Auto ABS - China: Delinquencies will remain low following
good performance in Q1 2017
• China's Sovereign Rating: Drivers of the Rating Change
to A1 Stable from Aa3 Negative and How the Change Affects Other Issuers
• Structured Finance - China: Chinese Structured Finance
Ratings Can Be Above Sovereign Level
• China Credit: Sovereign Downgrade to A1 Has Limited Implications
for Rated Portfolio
• China, Government of
• China Property Focus: Sales Slow in Face of Continued Regulatory
Tightening
• Government of China -- A1 Stable: Update Following Downgrade
to A1 and Change of Outlook to Stable
• China's Stricter Regulatory Framework for Regional and Local Government
Financial Management Is Credit Positive
• Chinese Non-Property Companies-Research April 2017
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Ivan Chung
Associate Managing Director
Greater China Credit Research
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Michael Taylor
MD-CCO APAC
Credit Strategy and Standards
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077