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

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.