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Announcement:

Moody's: Risk and opportunity in China's deleveraging and strong regulation

 The document has been translated in other languages

12 Dec 2017

Hong Kong, December 12, 2017 -- Moody's Investors Service ("Moody's") says that economy-wide leverage in China will continue to increase, albeit at a slower pace than before, while rising earnings growth is helping improve the credit profiles of the country's non-financial corporates.

"Moody's believes that following the 19th Party Congress, the consolidation of power around President Xi and at the central government level could increase the alignment of incentives between the central leadership and other officials, and thus could advance the process of economic reform and rebalancing," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer.

"However, it currently remains unclear whether the increased centralization of authority will result in an acceleration of the pace of reform or a continuation of the gradual implementation of economic liberalization, which balances other policy objectives, such as maintaining relatively strong growth and the strong role of state-owned enterprises (SOEs)" adds Taylor.

Taylor was speaking ahead of conferences in Beijing (12 December), Shanghai (14 December) and Shenzhen (18 December) hosted by Moody's and its Chinese affiliate, China Cheng Xin International Credit Rating Co. Ltd. (CCXI). The conferences are titled: "Risk and opportunity in financial deleveraging and strong regulation".

The one-day conferences will cover the sovereign, corporate, financial institutions, and regional and local government space, as well as the local bond market space.

Martin Petch, a Moody's Vice President - Senior Credit Officer in the Sovereign Risk Group, underlines the key policy challenge that confronts the Chinese government.

"Currently, in China, we see falling returns to what has been the driver of growth -- investment -- while the mis-allocation of capital is reflected in the rise in the incremental capital-output ratio (ICOR), a situation exacerbated by the mispricing of risk in the intermediation of locked-in savings", says Petch.

"Reducing the credit intensity of growth will be key to reconciling the government's objectives of maintaining a moderately high level of economic growth, while reducing overall leverage," says Petch.

Moody's corporate presentation -- given by Kai Hu, a Moody's Senior Vice President for the Corporate Finance Group -- is entitled "Moody's-rated SOEs' leverage levels will fall gradually".

"We note that the Chinese government is in the middle of a multi-year effort to improve the operating efficiency of SOEs and reduce their leverage, as highlighted in the opening speech by President Xi during the 19th Party Congress," says Hu.

"The government-initiated SOE and supply-side reforms will help Moody's-rated SOEs reduce their leverage by boosting EBITDA and slowing debt growth, or both," says Hu.

"In 2018, EBITDA growth will outpace debt growth for the majority of the rated SOEs," says Hu.

The banking presentation is titled, "Stabilizing amid stronger regulations," and Nicholas Zhu, a Moody's Vice President and Senior Analyst, says that the sector's stable outlook is further supported by a steady operating environment.

"We have stable outlooks for all the key areas of operating environment; asset quality; and government support, but we see liquidity and profitability as deteriorating," says Zhu.

"The banking system's stable outlook is also based on our assessment that the government's adoption of more coordinated policy measures to curb shadow banking will help mitigate asset risks for banks and address some key imbalances in the financial system," says Zhu.

On the subject of China's public finance issuers, Ivan Chung, Associate Managing Director, Head of Greater China Credit Research and Analysis, looks at whether they will become a new issuer class in the offshore market.

"Massive funding needs will continue to drive offshore issuance, while issuance is likely to be dominated by metro, rail and selected local government financing vehicles (LGFVs)," says Chung.

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:

• Banks: China's regulation of internet-based consumer finance is credit positive for banks

• Structured finance - China, India and Korea : 2018 Outlook - Delinquencies will remain low in China and Korea, but performance will vary by sector in India

• China Property Focus: Rated developers' sales growth remained strong amid nationwide slowdown

• Renminbi Bonds Monitor: November 2017

• Quarterly China Shadow Banking Monitor

• China Credit: Party Congress policy agenda is generally credit positive; challenges remain

• Banks — China: Improved asset quality and funding profile in the first half, but weakened profitability

• China's Belt and Road Initiative: BRI report card: Positive factors outweigh negatives for China and recipient countries

• Property — China : Most rated developers have capacity to manage higher bond refinancing risk in 2018

• Government of China -- A1 Stable: Regular update

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
Corporate Finance Group
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 Standard
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

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