Singapore, June 05, 2018 -- Moody's Investors Service says that China (A1 stable) is moving
ahead on changes in its economic structure, a credit positive.
The pace of shifts between sectors has risen, with the higher value-added
component of the economy increasing.
"If such measures lead to a reallocation of labor and capital resources
that shift credit towards sectors with higher productivity growth,
it will support the Chinese government's credit quality by increasing
its debt-carrying ability," says Marie Diron,
a Managing Director for Moody's Sovereign Risk Group.
The views are contained in presentations and discussions by senior Moody's
analysts at the "Moody's and CCXI 2018 Mid-Year China
Credit Outlook Conference, China credit trends -- Meeting the
challenges of domestic risks and global relations".
The conference, jointly held by Moody's and its joint venture
China Cheng Xin International Credit Rating Co. Ltd.,
takes place on 5 June in Beijing; 7 June in Shanghai, and 11
June in Shenzhen, and covers a wide range of subjects, including
credit issues related to the areas of sovereign, regional and local
governments, financial institutions, bond markets, corporate
finance and securitization.
"At the same time, economy-wide leverage has flattened
out. But while derisking is progressing in some areas, state-owned
enterprises' liabilities continue to rise faster than GDP,"
says Diron.
"In the context of trade tensions with the US, China will
stay focused on developing high-tech sectors, with or without
US supplies, as they are key to its growth plan," says
Lillian Li, a Vice President and Senior Analyst in Moody's
Credit Standards and Research Group, in her presentation entitled,
"China macro and sovereign prospects: Trade, deleveraging
and structural change".
"China also has the financial and policy levers to pursue this plan,
and sustained higher public sector spending would not materially alter
its fiscal strength and sovereign credit profile," adds Li.
With China's regional and local governments (RLGs), Moody's
says the difference between their spending needs and their funding capacity
has led the RLGs to rely on local state-owned enterprises (SOEs),
including local government financing vehicles (LGFVs), to support
infrastructure development.
"While China's central government has taken steps to increase
the RLGs' own funding capacity and restrict them from borrowing
funds through local SOEs, including LGFVs, the funding gap
remains, creating pressure to use alternative financing mechanisms,"
says Amanda Du, a Vice President and Senior Analyst with Moody's
Public, Project and Infrastructure Finance Group.
Moody's also expects defaults due to failures in refinancing to
increase, considering the tightening in funding conditions,
including the cautious stand of the banking sector.
"There has been a rising number of defaults among issuers since
the beginning of this year and we expect the trend to continue,
as funding conditions in the onshore market will remain tight,"
says Ivan Chung, an Associate Managing Director with Moody's
Corporate Finance Group.
"The funding environment is challenging for weak issuers or those
relying on short-term debt for refinancing," says Chung.
"At the same time, risk aversion is rising, as we see
onshore banks and investors are now more concerned about the fundamentals
and liquidity of issuers, contributing to further refinancing pressure
on issuers with weak credits," says Chung.
Moody's also believes that China's banking system has entered
a period of slow growth, and reacted to the broad directive to reduce
regulatory arbitrage, opaque investments and other shadow banking
activities.
"The 2017 results announced by China's top five commercial
banks and Postal Savings Bank of China, four joint stock commercial
banks and two city commercial banks support this view, and we expect
these adjustments to continue in 2018, with a key driver being tighter
scrutiny of banks' compliance with wholesale funding caps,"
says Ray Heung, a Senior Vice President with Moody's Financial
Institutions Group.
"At the same time, asset quality and margin improvement will
support profitability for China's banks in 2018," says
Heung.
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.
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Ivan Chung
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077