Moody's: Equity market volatility will have limited impact on rated Chinese issuers

Moody's Investors Service says that the volatility in China's (Aa3 stable) equity market since mid-June will have limited impact on rated Chinese debt issuers, while stability and growth imperatives remain the government's top priorities.

"The direct impact from heightened volatility in China's equity market on financial sector output growth will be limited, while the indirect effects of market uncertainty on consumer spending, employment and corporate investments will be similarly muted," says Michael Taylor, a Moody's Managing Director and the Chief Credit Officer for Asia Pacific.

"Recent policy actions by the government prioritise short-term economic and financial stability over longer-term structural market reform," adds Taylor. "But we view the government's intervention as only a deviation from, rather than a repudiation of, its broader economic reform agenda, including the stated goal of giving the market a decisive role in allocating resources."

Moody's conclusions were contained in its just-released report "China Credit: Equity Market Volatility Has Limited Impact on Chinese Debt Issuers".

Moody's report highlights that it does not expect a major spillover effect on China's real economy from the stock market. Moody's sovereign assessment already assumes a gradual slowdown in real GDP growth to 6.5%-7.5% in 2015 and 6.0%-7.0% in 2016. The recent volatility in equity prices does not warrant a change in this growth forecast, says Moody's.

Furthermore, the potential for contingent liabilities to crystallise on the sovereign balance sheet, should securities companies run into trouble, would be manageable.

For other sectors, Moody's does not expect a material credit impact from increased equity market turbulence, although some temporary negative effects are likely to emerge.

Moody's report highlights that recent policy actions are negative for the standalone credit profiles of securities companies, but that government support for the sector will be significant.

Commercial banks' direct exposure to the domestic equity market is low, and therefore stock price volatility will not have a significant impact on credit quality. However, recent regulatory measures will encourage banks to provide loans for listed companies to purchase their own shares, which risks increasing the sector's exposure to stock market volatility and to borrowers with rising financial leverage over time.

On the insurance sector, Moody's says that the increased investment limits for insurers on blue-chip stocks are credit negative, because this allows them to increase their equity investments and exposure to stock market volatility. However, insurers will also have to hold more capital to reflect the higher market risk associated with equity investments. Furthermore, insurers registered unrealised gains during the run-up in stock prices from equity investments held previously.

Finally, increased stock market volatility will reduce Chinese corporates' access to equity capital, but this accounts for only a fraction of corporate funding. Furthermore, a number of rated companies have already taken advantage of high market valuations to sell stakes and raise equity, boosting their credit profiles.

Longer term, the impact on Chinese corporates could be more negative if stock market weaknesses were to persist so as to discourage corporates from raising equity funding, particularly given the run up in leverage in recent years.