Moody's: China's anti-corruption campaign generally credit positive, despite some event risk

Moody's Investors Service says that China's (Aa3 stable) ongoing anti-corruption campaign is largely positive for the rated sovereign and state-owned enterprises (SOEs). However, sectors such as gaming companies face revenue risk due to the campaign, and other sectors face some residual downside risk which is difficult to quantify. 

"China's anti-corruption campaign supports the government's goals of economic and institutional reform and macroeconomic rebalancing. The reforms will deliver growth that is less reliant on high levels of investment over time, will enhance the productivity of capital allocation, and encourage entrepreneurial activity ," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific. 

"Although the anti-corruption campaign will be generally positive for most issuers, there are still pockets of risk, mainly concentrated in high-yield, lower-rated private companies, which are generally more dependent on key individuals," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst. 

Moody's conclusions are contained in its just-released report on China credit, titled "China Credit: Anti-Corruption Campaign Is Generally Positive Despite Some Event Risk". 

Moody's report highlights that the campaign will advance the government's efforts to boost the efficiency of SOEs' operations, which in turn will support their financial profiles. In addition, Moody's expects large, strategically important SOEs will continue to receive a high degree of government support. 

But tighter controls over the contracting process for upstream providers of services and goods to the SOE sector could impact their revenues and therefore creditworthiness owing to longer lead times. 

For example, revenue growth for Chinese oilfield services companies has come under pressure, as lengthened approval times and tighter project requirements have delayed spending by national oil companies. 

Moody's further says that tighter budget constraints and greater scrutiny of state officials are weighing on VIP gaming revenues in Macau, weakening EBITDA generation for the rated gaming operators. 

As for event risk, Moody's points out that the risk of senior executives being placed under investigation or relieved from duty is greater among smaller, privately owned companies, which are generally more dependent on key individuals and whose removal would likely have more material credit consequences. 

And more generally, such news could dent investor confidence in a particular company or sector, with the Chinese property sector being a prime example. 
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1003992. 

Moody's has launched a new topic page, China -- Reform and Rebalancing, to provide a centralized source for Moody's research related to key credit issues in China as the country's rebalancing story unfolds. This report is part of Moody's ongoing coverage on this theme. 

Recent Moody's publications relating to China Reform and Rebalancing include: 

- Rated Developers' 2014 Results Reflect Weakened Fundamentals; Regulatory Loosening Should Ease Challenges 

- China Tightens Control over Its Policy Banks, a Credit Positive; 

- China Pharmaceutical Sector: Ongoing Medical Reforms Benefit Large Chinese Pharmaceutical Companies; 

- Inside China - April 2015 ; 

- China's New Deposit Insurance Scheme Is Credit Negative for Small Banks; 

- Chinese Property Developers Will Benefit from Relaxed Mortgage Lending Terms and Housing Tax Rules; 

- Chinese Banks' 2014 Results Warn of Further Adjustment Pressure Ahead; 

- Chinese Auto Loan ABS: Delinquencies and Defaults Remain Low, Some Performance Variation Between Transactions; 

- China's Easing of Mortgage Lending Terms and Housing Taxes Will Support the Property Sector