Moody's Outlook on China's Non-Financial Corporates is Stable

Moody's Investors Service says its outlook on China's (Aa3 stable) nonfinancial corporates is stable, reflecting its expectation that domestic economic growth will continue to decline gradually, to just below 7.0% in 2015 from 7.3% in 2014.

This level of economic growth should still support steady revenue growth for most rated Chinese corporates.

"Ongoing economic rebalancing and reforms will benefit state-owned enterprises and consumer-focused sectors, but challenges remain for oversupplied industries such as steel and mining," says Kai Hu, a Moody's Vice President and Senior Credit Officer.

Hu was speaking on the release of Moody's 2015 outlook for Chinese non-financial corporates. The outlook reflects Moody's expectation for fundamental business conditions in the industry over the next 12 months.

About 83% of the companies that Moody's rates have stable outlooks. Fifteen percent have negative rating outlooks or are on review for downgrade, indicating negative rating actions will likely outnumber positive ones.

Downgrades in the first nine months of 2014 were mostly for property, coal, and steel companies. Pressure on companies in these sectors will continue amid oversupply or weakening sales.

Outlooks are negative for the property and coal sectors. The property sector's negative outlook reflects a protracted decline in home sales, while oversupply and weak prices drive the negative coal outlook.

Outlooks are stable for China's oil and gas, retail and consumer products, power and gas, and construction and engineering services industries.

Despite the oversupply situation, the stable outlook for the steel sector reflects moderate profitability growth amid higher capacity utilization and lower raw materials costs.

"Stable domestic credit conditions and moderate cross-border refinancing needs should help rated companies maintain adequate liquidity," says Gary Lau, a Moody's Managing Director. Furthermore, monetary policy will remain supportive and debt markets will remain accessible for most rated corporates.

Moody's would change outlook of Chinese non-financial corporates to negative if domestic GDP growth slowed to around 5%-6%, market liquidity tightened or the domestic property weakened beyond its expectations.

A positive outlook would require GDP growth of 8% or higher, provided such growth is not driven primarily by credit, a stronger-than-expected recovery of the global economy, particularly in the US and Europe, or a reduction in the oversupply in sectors such as steel and mining.