Credit Quality of Chinese Industries a Mixed Bag in Short-Term

Amid an ongoing slowing in growth rates, the credit quality of Chinese companies [non-property] may play out in a tale of sector divergence over the next year to a year-and-a-half, with the oil and gas, steel and broader commodities areas struggling and consumer-based areas such as food and beverage, auto and construction racking up gains.

Structural changes in Chinese consumption preferences and distribution will support growth for companies in the Internet and technology sectors, albeit at the expense of traditional retail formats like department stores, said Moody’s Investors Service in its report today on key credit trends for these and other sectors in China.

For food and beverage companies, low raw material prices should support steady profit margins and “provide a buffer against weak revenues and pressure on profitability,” Moody’s analysts said. Automakers benefitting from China’s vehicle-purchase tax cut should experience sales gains in 2016. Slowing construction in the property and metallurgical sectors could be offset by moderate demand from Chinese and overseas infrastructure builds.

Meanwhile, the Chinese steel sector’s profitability will drop from falling production volumes and lower capacity use, as lower input material prices are “no longer sufficient to offset” muted market pricing, Moody’s predicted. Consequently, steelmakers' debt leverage and liquidity risk continue to rise, in turn raising corporate default rates in the sector,” says Lina Choi, a Moody's vice president and senior credit officer.

The bulk chemicals industry will see worsening oversupply, weak demand and lowered prices and profits, Moody’s predicted. Some specialty chemicals producers may, however, benefit from low oil prices.

“In the metals and mining sector, the sharp drop in revenue and earnings has raised leverage for many entities, which Moody's expects will lead them to balance cash preservation with the pursuit of growth opportunities,” the ratings firm said.

- Nicholas Stern, NACM editorial associate

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