HONG KONG - China's corporate sector will come under increasing strain this year as economic growth slows, industrial overcapacity crimps profitability and cash flow, and an elevated appetite for expansion weakens leverage, according to a new report from S&P Global Ratings. "China now has the highest corporate leverage among major industrial countries, with an average debt-to-GDP ratio of about 160%, said S&P Global Ratings credit analyst Christopher Lee.
"Credit quality is deteriorating more quickly than at any time since 2009, with our negative rating actions exceeding positive rating actions by 3:1 in the first half of 2016."
Except for China Fishery Group Ltd., a repeat defaulter, there were no other defaults in the first six months, but Lee sees this as an aberration given the sharp deterioration in credit risks in S&P’s rated portfolio.
"Given the deterioration in leverage and cash-flow to a critical level for some issuers, any weakening of the currently favourable funding environment could push them over the edge,” he said. “In 2015, six issuers defaulted, representing 2.5% of the number of total rated corporate issuers in Greater China."
“The pressure on profitability, cash flow, and leverage remains high despite cost-cutting, reduction in capital expenditure, and the prospect that industrial demand will stabilise in the second half of the year.
“Financing conditions are supportive of refinancing for our rated corporates, which are among the leading companies in their sectors.
“Nevertheless, the favourable funding conditions could turn around this year because lenders are increasingly cautious towards highly indebted borrowers from certain sectors and provinces, and perceptions may be shifting that the companies will have implicit support from the central or local government, due to rising credit costs.
“The current conditions may push more corporates to default in the bond market, potentially creating mini credit crunches. www.standardandpoors.com (ATI).
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