Fitch: CNY Decline Not A Systemic Risk for Chinese Corporates

Further declines in the yuan/dollar exchange rate should not pose a significant direct systemic risk to Chinese corporate debt sustainability, says Fitch Ratings.

In a report published today, Fitch assessed the foreign-currency debt exposures for non-financial corporates in China. Only 180 of the more than 3,100 listed non-financial Chinese corporates are directly exposed to foreign-currency debt, and of these, most are large firms and state-owned enterprises.

The sectors and companies most likely to be exposed to balance-sheet FX risk are those with a high proportion of FX debt and high financial leverage. But, by sector, this combination is rare for listed Chinese entities. Sectors where FX debt/total gross debt exceeds 70% have relatively low gross debt to EBITDA. Conversely, sectors with high leverage ratios - above 5.0x - have a relatively low proportion of FX debt.

A combination of uncertainty about the future direction of the yuan/dollar exchange rate and a decline in Chinese interest rates could spur some corporates to shift their focus to the onshore yuan bond market instead of issuing bonds denominated in foreign currencies or borrowing from banks in dollars. But the effects on local capital markets should be limited as the amount of planned FX debt issuance relative to the size of China's domestic corporate bond market is small. This is also unlikely to have a substantive impact on China's local-currency bond market in the longer term, as this has expanded significantly over the past decade alongside deregulation and the growth in the economy.

Detailed analysis on the effects of yuan depreciation on Chinese corporate debt sustainability can be found in the report "Yuan Depreciation Not a Systemic Risk for Chinese Corporates" at www.fitchratings.com or by clicking on the link in this media release.