Growth in China may be dampened by upcoming lockdowns

China’s fixed-asset investment rose 5.7% y/y in January-July, well below our expectations. This marks a softening from the 6.1% expansion in the first half. Investment slowed in all sectors, with primary industries particularly weak.

Asset management companies – China: Aiding property sector will hurt profitability and capital but lower asset risks

China's asset management companies (AMCs) focusing on distressed asset management will support the property sector in various ways – though selectively due to capital constraints and commercial considerations – as the Chinese government seeks to contain risks from the sector to China's economy and financial system. Supporting the property sector will hurt AMCs' profitability and capitalization but it will also reduce asset risks for them.

China Posts Record Foreign Trade Surplus of $101.3 Billion in July

China’s foreign trade surplus rose to a record high of $101.3 billion in July. This was well above market expectations and cooled concerns about falling global demand.

Banks – China: New challenges emerge as wealth management business reform proceeds

Chinese banks have over the past three years made progress toward complying with regulations designed to make their popular wealth management products (WMPs) less risky and more transparent, a credit positive. The sector now has until the end of 2022 to mitigate liquidity risk by ensuring that short-dated cash management WMPs do not invest in long-dated illiquid assets, although they may hold existing long-dated bank capital bond portfolios to maturity.

State-Owned Enterprises (SOEs) – China: Rated SOEs' leverage will remain stable at elevated levels in 2022-23

Leverage will remain elevated. We estimate aggregate average adjusted debt/EBITDA will remain elevated at around 6.2-6.3x for rated Chinese nonfinancial state-owned enterprises (SOEs)1 in 2022 and 2023, as government policy shifts from deleveraging to stabilizing SOE leverage. Rated SOEs’ EBITDA growth will slow from 2021 highs amid lower GDP growth. Still, we expect debt to continue to grow to fund investments, though at a more moderate pace

Cross Sector – China: Mortgage defaults on unfinished properties credit negative for banks and developers

On 14 July 2022, 17 Chinese banks disclosed mortgage defaults related to presold but unfinished properties that suspended construction. The increase in such mortgage defaults is credit negative for China's banking system and property developers. While mortgage defaults related to construction suspension have only accounted for a small proportion of banks’ loan books thus far, we expect amounts of such mortgage defaults to increase given the continuous stress of property developers.

Nonfinancial Companies — China: Potential commercial bill rule revisions to raise liquidity risk; weak developers exposed

Increasing number of overdue commercial bills highlights credit risk. Commercial bills, which are also known as bills of exchange, primarily act as a payment tool for companies to settle amount due to suppliers but have gained popularity as an additional source of funding for Chinese companies. However, they (in the form of commercial or banker's acceptances) can transmit additional credit risks to companies along the supply chain or banks that accept or discount them, especially when the companies issuing commercial bills face liquidity pressure.

China Paying More at the Pump

Discounts of Russian crude to China are relative, not absolute. Energy policy is coming back into focus in China. Chinese consumers aren’t immune from global oil price increases. Chinese customs data show that Russian crude is not as discounted as spot prices would suggest.

Property – China: China Property Focus: Defaults will continue despite narrowing sales decline

Decline of national sales will likely narrow. Monthly national contracted sales value declined by 41.7% year-on-year in May, narrowing from a 48.6% decline in April, likely because of the gradual easing of COVID-related restrictions. Although homebuyers will likely remain cautious in the near term, we expect the sales decline to narrow in the second half of 2022 as policy easing gradually takes effect.

China Residential Property Market Firmly in Correction

The 2021 crackdown on ballooning debt at China's property developers caused housing prices to skirt correction territory, with the average price per square meter sold for residential property retreating 9.1% last year—the first retreat since 2008 where the price per square meter sold declined 1.9%.

China Isn't Worried About Energy Right Now

With Shanghai finally released from lockdown, and Beijing not moving into a similarly styled lockdown, eyes are now on how fast the recovery can be. China’s recovery in 2022 may still be dependent on how much energy it can get on the cheap. There are signs, however, that China is not as worried this year.

China Supply-Chain Stress Update: Much to Digest in May

China’s supply-chain stress index inched higher in May, despite easing of aggressive movement controls in some cities including Beijing and Shanghai. The headline index rose to 116.1 in May, from April’s 115.2.

Banking – China: Banks cautious in supporting property developers but asset risks still remain high

Chinese banks will remain cautious about financing property developers – especially distressed property developers – despite recent active policy guidance to stabilize the sector. Financially distressed developers will continue to raise asset risks for banks this year amid tight funding and weak property sales.

Property – China: China Property Focus: Sales declined further and policy easing impact not immediate

National sales decline widened in April. National contracted sales value (three-month moving average) declined by 34.4% year-on-year in April 2022, compared with a decline of 25.6% in March 2022. This reflects the continuation of weak homebuyer confidence, as well as disruptions caused by travel restrictions and lockdowns because of COVID-19.

Nonfinancial Companies – Asia (ex Japan) Tide of property downgrades drives B3 negative and lower list to record high

B3 negative and lower list (B3N List) climbs to all-time high of 30.5%. The B3N List included 36 companies at 31 May 2022, nearly double the number of companies a year ago. The surge in downgrades of Chinese developers since late last year is behind the record breaking level. Growth in the B3N List means default risks (including distressed exchanges) remain high, particularly as concerns over the Chinese property sector and geopolitical risks continue to disrupt access to funding for Asian high-yield (HY) companies.

Steel – Asia Pacific: Higher raw material costs reduce benefit of steel price gains amid Ukraine conflict

Elevated steel prices and steady demand to support rated steelmakers’ revenue. Steel prices have risen on a surge in raw material costs and fears of supply constraints in Europe amid the Russia-Ukraine conflict. Prices of iron ore and coking coal, two key components of producing steel in the commonly-used basic oxygen furnace (BOF) method, have surged in recent months and are expected to stay elevated as the conflict further tightens supply.

RMBS – China: Housing affordability will improve on lower interest rates and declining property prices

Housing affordability in China, which improved slightly in 2021, will continue to improve over 2022. Improving housing affordability is credit positive for new mortgages in Chinese residential mortgage-backed securities (RMBS) portfolios.

China Credit Conditions (May 2022): COVID-19 lockdowns, property downturn and policy uncertainty weigh on growth outlook

We have lowered our 2022 GDP growth forecast for China (A1 stable) to 4.5% from 5.2%, with expectations of a 5.3% rebound in 2023. Our revised forecasts reflect COVID-19 disruption to business activity, the ongoing property market downturn and heightened uncertainty about the pandemic restrictions and geopolitical relations.

Property – China: Negative outlook reflects continued tight funding conditions and sluggish sales

Our outlook for China's property sector is negative, reflecting our expectations for credit fundamentals in the industry over the next six to 12 months. Negative outlook reflects three factors. Funding conditions will remain tight for rated developers, especially those that are financially weak. Nationwide contracted sales will fall 10%-15% in 2022, though the decline will narrow thereafter in part due to the low base effect. Inventory levels could rise further in the near term before falling.

Local government financing vehicles (LGFVs) ‒ China: LGFV Bond Monitor Fourth quarter 2021

LGFVs will be the largest issuer class in both the onshore and offshore markets in 2022 In terms of annual issuance, LGFVs have been the largest issuer class among all corporate issuers in the onshore market for the past several years. LGFVs’ onshore issuance was RMB5.9 trillion in 2021, accounting for 45% of total onshore bonds issuance by corporates. In view of their refinancing amount and funding needs, we expect LGFVs to remain the largest issuer class in the onshore market in 2022.

Banking System Outlook – China: Outlook stable on steady liquidity despite a deteriorating operating environment

Slower GDP growth, lower interest rates, ongoing property sector distress and external uncertainties arising from the Russia-Ukraine military conflict will weaken Chinese banks' operating environment and asset risk in the coming 12-18 months. However, our outlook on the China banking system is stable because Chinese authorities can use multiple policy tools to effectively support economic activities and credit demand, supporting stable credit growth and limiting the pressure on banks' asset risk.

Local Government Financing Vehicles – China: Slowing land sales put pressure on local governments and their financing vehicles

Lower revenue growth from land sales will pressure RLGs' fiscal profiles. Revenue growth from land sales conducted by regional and local governments (RLGs) will likely remain sluggish in 2022.

China sets 2022 GDP Growth target at around 5.5%

With multiple headwinds facing its economy, China has laid out supportive policies to achieve its target. Although China usually beats its growth target, Moody’s Analytics forecasts China’s GDP to grow 5.1% this year.

China still all in on zero-COVID policy

Chinese cities have seen a return to lockdowns as an Omicron wave threatens to be the biggest COVID-19 outbreak since the initial Wuhan crisis two years ago. Another wave of supply-chain disruptions will come.

U.S. supply-chain stress could intensify as China continues with lockdowns

An easing in U.S. supply-chain stress is critical to the outlook for inflation to moderate, but new potential issues have emerged that may cause supply-chain issues to intensify. Any significant disruption to China’s exports could lead to higher inflation in the U.S.

Government Policy – China: Two sessions aim for robust growth via targeted support; credit impact subject to policy implementation and transmission

At annual meetings of China's (A1 stable) top legislative and advisory bodies, policymakers set a relatively strong growth target for 2022 despite rising economic pressures and external uncertainties.

Property – China: More developers to default in 2022 as liquidity remains stretched

More developers will default in 2022, including distressed exchanges. Tight funding conditions and sizable refinancing needs (including around $32 billion of offshore bonds) for the rest of 2022 will continue to pressure developers' liquidity and increase the number of defaults, including distressed exchanges, in the year.

Trust companies - China rising risk on real estate exposure a key 2022 challenge

Trust companies have more real estate sector exposure than other financial institutions. China's current property market distress could push up delinquencies in these companies' trust plan assets, therefore weakening the underlying asset quality and liquidity of the trust plans.

China supply-chain update: Divergence beneath the surface

At first glance, it appears that supply-chain stress in China has eased, but it’s critical to look at the underlying drivers.

China unleashes Olympic diplomacy blitz

Despite the U.S.-led diplomatic boycott of the Beijing Winter Olympics, China has pulled out all of the stops for the guests who did arrive.

Steel – China: Extended peak emissions deadline is credit positive for steelmakers

On February 7, China’s Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission (NDRC) and the Ministry of Ecology and Environment jointly issued a guidance that extended the deadline for the steel sector to reach peak carbon emissions by five years.

Property – China: China Property Focus: Contracted sales will decline in 2022 amid tight liquidity

We expect national contracted sales to decline by 5%-10% in 2022. National contracted sales value grew only 5.3% year-on-year in 2021, lower than the 10.8% growth in 2020 and 10.3% growth in 2019, as volume dropped and the growth rate of the average selling price (ASP) declined in the second half of 2021 amid the tightened credit environment.

China Risk Matrix Update: A Double-Edged Sword

The zero-COVID strategy increasingly weighs on economic expansion, denting income, consumption growth and consumer confidence.

China's retail sales growth wanes again

China’s retail sales softened in November as yearly growth moderated to 3.9%, the second-lowest reading since the beginning of the year. Lingering virus outbreaks suppressed demand, as did rising consumer prices and slowing income growth.

Cross Sector – China Quarterly China Shadow Banking Monitor

The decline in shadow banking asset in 2021 reflects regulators’ continued focus on containing systemic risk in the financial sector. The economic leverage ratio will stabilize in 2022 as regulatory controls remain while economic growth slows.

Beijing puts stability in vogue

The key theme emerging from China’s Economic Work Conference, which concluded on 10 December, is stability. The two-day conference defines China's policy priorities for the coming year. Stable economic growth is the central economic theme for 2022. It will materialize via “proactive fiscal policies and prudent monetary policies.”

China credit conditions (December 2021) - Economic outlook is stable, but COVID-19 disruption and policy uncertainty pose risks

China’s (A1 stable) growth momentum slowed in H2 2021, weighed down by muted consumer activity, intermittent COVID-related mobility restrictions, power shortages, supply chain backlogs and a slowdown in property construction.

Upside surprise for China trade

China's trade surplus narrowed to US$71.7 billion in November, from October's US$84.5 billion. China’s increasing appetite for raw materials and agricultural and energy products further boosted imports value. Exports grew at a relatively modest pace compared with imports, resulting in a narrowed trade surplus in November.

China offers Africa vaccines and investment

During a video address to FOCAC, Chinese President Xi Jinping pledged a donation of 600 million COVID-19 vaccine doses for Africa, with a further 400 million doses to be available via Chinese-backed vaccine production sites within Africa. Chinese companies are looking to invest US$10 billion in Africa over the next three years.

Regional & Local Governments – China Q3 2021 Debt and Finances Update

The economies of most provinces in China (A1 stable) slowed in the third quarter, driven by a range of factors including a production disruption caused by power shortages and emerging stress in the property sector. The two-year average GDP growth rate for the first nine months of the year was 5.3%, still lower than pre-pandemic growth of 6.0% for the same period of 2019.