China companies face ‘credit deterioration’

August 19, 2013 4:46 pm

China companies face ‘credit deterioration’

By Robin Wigglesworth in London

China’s economic slowdown and indebtedness will cause the creditworthiness of the country’s biggest companies to deteriorate in the coming year, Standard & Poor’s has warned in a report. The credit rating agency has examined the balance sheets of 151 major Chinese companies – three-quarters of which are state-owned enterprises – and noted that the recent investment boom has left the corporate sector with “a large debt hangover”.Standard & Poor’s analysts believe the financial strength of a “majority” of the 151 companies in the survey will weaken further in the next 12 months.

“A sizeable minority with highly leveraged balance sheets and continued high investment appetites remain particularly vulnerable in the current slowdown,” the agency said in the report.

Recent data has nurtured hopes that China’s economy, the second-biggest in the world, has stabilised over the summer after growth slowed in nine of the past 10 quarters.

While retail sales growth slipped in July, investments stabilised and industrial production at large companies, a closely watched measure that usually tracks China’s gross domestic product, rose 9.7 per cent from a year earlier in July, the fastest pace since February.

Chinese premier Li Keqiang has promised to maintain the country’s year-on-year economic growth rate above an unspecified lower limit, which most analysts believe is about 7 per cent, while keeping inflation under control.

The International Monetary Fund in July slashed its growth forecasts for China to 7.8 per cent this year and 7.7 per cent in 2014, but that would still make the Asian powerhouse one of the biggest contributors to global growth.

However, some analysts are more bearish. Michael Pettis, a finance professor at Peking University, argues that 3-4 per cent average annual growth could be the “upper limit” to growth as it rebalances its economy away from exports and investment towards domestic consumption.

S&P has assumed Chinese growth of 7.3 per cent in both 2013 and 2014 but warned that rising indebtedness still posed a risk to some companies.

The agency forecasts corporate credit growth will moderate in 2013 but expects the weakening economy to weigh on revenues and increase the effective debt burden.

“We assess the standalone financial risk profiles for China’s largest companies as on average relatively weak,” it said.

The strongest sectors in the survey were telecommunications, oil and gas, consumer products and healthcare and pharmaceuticals, while mining, building materials, transportation and especially steel are struggling with overcapacity following the investment boom.

In the credit rating agency’s downside scenario – 6.5 per cent growth in 2013 and 5 per cent in 2014 – S&P saw a potential for downgrades of two or more rating notches in coal, metals, mining and transportation.