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Announcement:

Moody's: More corporate defaults in China to come, but mitigated by policy support

 The document has been translated in other languages

Global Credit Research - 10 Jun 2015

Singapore, June 10, 2015 -- Moody's Investors Service says that the number of companies in China (Aa3 stable) in financial distress will rise as slower domestic economic growth and the government's reform agenda, intended to allow markets to play a "decisive" role, expose overstretched balance sheets in the corporate sector.

But policy easing and government support will prevent rising corporate distress from escalating to a level that would cause systemic risk to the onshore and offshore markets.

"The increased number of onshore corporate defaults in 2015 -- which already exceeds the total number for last year -- breaks the myth of the 'automatic bailout' in China's onshore market, which had led some investors to ignore credit fundamentals in the expectation that all debt would ultimately be underwritten by the state," says Kai Hu, a Moody's Vice President and Senior Credit Officer.

"The perceived reduction of such implicit guarantees will result in greater differentiation in the onshore bond market, which will in turn enhance risk-based pricing of debt," adds Hu.

Moody's conclusions are contained in its just-released report entitled "China Credit: Corporate Distress Is Rising, but Policy Support Will Prevent Systemic Risk".

Moody's report highlights that corporate revenues at Chinese corporates have weakened in lockstep with nominal GDP growth, with the latter decelerating to 5.8% year-on-year during Q1, the slowest pace since the height of the global financial crisis in Q1 2009.

Such weaker revenues have increased system-wide corporate leverage, which stood at around 150% of nominal GDP in Q3 2014, according to Moody's estimations, a 34-percentage-point rise over the past five years.

Moody's highlights that high-yield private companies in sectors with excess capacity, such as steel, mining, solar, commodities trading and shipbuilding, are most exposed because their financial profiles are relatively weak and their access to funding is limited.

While corporate defaults in China are thus likely to increase in frequency, Moody's expects policy easing and government support will prevent an escalation of corporate defaults and systemic risk to the onshore and offshore markets.

"The authorities are demonstrating a renewed bias towards policy easing and flexibility towards structural reform in other sectors in order to engineer a soft landing," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst.

Moody's points out the high-profile property sector has been one of the first recipients of policy support. This led to market conditions stabilizing during January-April, leading to expectations of a modest recovery in sales volumes for 2015, in sharp contrast to the fall evident in 2014.

Looking ahead, Moody's says the central government has adequate fiscal and monetary headroom and exerts sufficient control over the economy to avoid widespread corporate failure and support the banking system.

Room is also available for a further loosening of monetary policy should macroeconomic conditions continue to deteriorate, given that real lending rates and the reserve requirement ratio remain high by historical standards.

Subscribers can access the report at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1005367.

Moody's offers complimentary access to its new topic page, China -- Reform and Rebalancing, a centralized source for Moody's research related to key credit issues in China as the country's rebalancing story unfolds. This report is part of Moody's ongoing coverage on this theme. Register today at www.moodys.com/chinarebalancing for access to all research on this page.

Recent Moody's publications relating to China Reform and Rebalancing include:

1. China Property Outlook: Supportive Policies Underpin Modest Sales Growth and Stable Outlook

2. Country Statistics: China

3. Sub-Sovereign: Chinese Policies Allow Higher Leverage for Local Government Financing Vehicles, a Credit Negative

4. China Property Focus -- May 2015

5. Credit Opinion: Government of China

6. Chinese Province Extends Maturity Schedule with First 2015 Bond Issuance

7. China's Healthcare Reforms Benefit Large Pharmaceuticals

8. Chinese Pharmaceutical Sector: Removal of Direct Government Drug Price Control will Benefit China's Pharmaceutical Industry

9. Chinese Banks: Government Support to Remain Strong But Become More Nuanced

10. China's Interest Rate Reduction Is Credit Negative for Banks

These reports are available on http://www.moodys.com/chinarebalancing.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

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.

Rahul Ghosh
Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Michael Taylor
Managing Director
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's: More corporate defaults in China to come, but mitigated by policy support
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