NPC Reaffirms Changing Landscape for Chinese Corporates: Moody's

Moody's Investors Service says that the economic growth targets presented by the National People's Congress (NPC) during its annual meeting are credit positive for companies in China that provide products and services to consumers, but add pressure to oversupplied sectors.


The government maintained a GDP growth target of 7.5% for 2014, unchanged from 2013, and reduced its fixed asset investment growth target to 17.5% from 18% for 2013. Actual fixed asset investment growth was 19.3% in 2013.


"These projections, while not surprising, reinforce China's commitment to shifting economic growth drivers to domestic consumption from infrastructure spending," says Jiming Zou, a Moody's Assistant Vice President and Analyst, speaking on the release of a new special comment entitled "National People's Congress Reaffirms Changing Landscape for Chinese Corporates."


In particular, the government stressed the importance of agricultural self-sufficiency and food safety. This focus will create a favorable operating environment for rated companies such as COFCO (Hong Kong) Ltd. (A3 stable), Bright Food (Group) Co., Ltd. (Baa3 stable), China Mengniu Dairy Company Limited (Baa1 stable), and Want Want China Holdings Ltd.(A3 stable).


These companies are among the largest in their industries and have strong brand equity, and will therefore see their market shares rise as the stringent enforcement of food safety standards eliminates non-compliant players and drives industry consolidation.


Internet companies Tencent Holdings Ltd. (Baa1 positive) and Baidu Inc. (A3 stable) will also benefit, as the government supports the development of e-commerce to drive consumption. Their online platforms drive traffic from a large user base to access offline information and purchase a wide range of consumer goods and services.


At the same time, the government reiterated in the NPC its focus on cutting pollution, adding pressure on oversupplied industries.


"Polluting industries with excess supply, such as steel, cement, glass and coal mining, which are already under pressure from slowing demand and weak profits, will be most affected," says Zou.


Companies with high levels of debt leverage, such as Hidili Industrial International Development Ltd. (Caa1 negative), Winsway Coking Coal Holdings Ltd. (Caa3 negative) and China Oriental Group Company Ltd. (B1 negative), will face high financial risk, as environmental protection initiatives reduce their production or revenue and increase their compliance costs.


By contrast, earnings will likely increase for companies with natural gas businesses, such as China National Petroleum Corp. (Aa3 stable) and China Petroleum and Chemical Corp. (Aa3 stable), while China Longyuan Power Group Corporation Ltd. (Baa3 stable) and China Three Gorges Corporation (A1 stable) will benefit from their involvement with wind and hydro power.


The Moody's report further states that interest rate liberalization will boost financing costs for corporates. The government affirmed its push for the liberalization of interest rates during the NPC, and China's central bank chairman signaled a possible acceleration of deposit-rate liberalization in the next year or two.


"Corporate clients with weak credit profiles will see higher interest costs and lower EBITDA-to-interest coverage," adds Zou.


Moody's report furthermore states that reforms for state-owned enterprises (SOEs), including the introduction of private capital, should alleviate funding pressure and increase SOE efficiency.


However, ongoing SOE reforms will have different effects on each SOE and will need to be judged on a case-by-case basis.


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