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.
China Turns Up the Gas
The country is inching away from coal and using natural gas as a bridging energy source. Chinese State Council guidelines aim for non-fossil energy sources to meet more than 80% of energy consumption by 2060.There’s a long way to go. In 2019, non-carbon fuel sources represented 8.7% of energy consumption.
China's Money Supply Picked Up in October
Mortgage lending in China appears to be stabilizing. China’s M2 money supply growth picked up to 8.7% in October from 8.3% in September. Deposits of nonbank financial institutions surged while those of households and nonfinancial businesses declined. M1 growth cooled to 2.8% in yearly terms from3.7% in September, despite the central bank’s persistent efforts to inject liquidity into the system.
Global Macro Outlook 2022-23: Global economy will gain steadier footing although supply troubles, inflation pose risk
Weaker-than-expected growth momentum and an upside surprise to inflation have dented some of the optimism surrounding the global economic recovery. Over the course of 2022, however, we expect uncertainties with regard to the COVID-19 pandemic, supply chain imbalances and labor shortages to diminish, allowing the economy to enter a stable growth phase through 2023.
Property – China: China Property Focus: National sales growth will stay weak amid tight funding conditions
Tight funding conditions continued to hinder national contracted sales in September. Although the decline in monthly year-on-year contracted sales value narrowed in September to 16.9% from 19.7% in August, sales remain weak as funding conditions continue to be tight.
China expands property tax trial
The tax is expected to reduce housing speculation, especially if local governments use part of the revenue to build affordable housing. Despite short-term pains, the tax is expected to generate long-term benefits, the most important of which is to provide more stable funding to local governments.
Property – China: Liquidity weakens, refinancing risk rises rapidly across the sector
Funding access for Chinese property developers has tightened since late last year with regulations aimed at controlling developers’ leverage, the associated risks to the country's financial system and the government’s objective to reduce reliance on real estate investment as a driver of economic growth.
Quantifying China’s supply-chain disruptions
Our China Supply-Chain Stress Index continued to rise in September. China is both a contributor to and victim of the supply-chain disruptions causing havoc across the globe. China's zero approach to COVID-19 can mean that ports or factories close at short notice in response to an infection outbreak.
Financial Institutions - China: Potential weakness in real estate market from the Evergrande fallout is credit negative
On 29 September, China Evergrande Group (Evergrande, Ca negative) announced that one of its subsidiaries would dispose of its 19.93% stake in Shengjin Bank for a total consideration of RMB 9,993 million.
China goes for record in foreign direct investment
The country is likely to exceed CNY1 trillion in FDI this year. However, foreign investor confidence may be dampened in the near term while authorities tackle supply-chain disruptions, property market woes, and other big issues. The government will need to convince hesitant foreign investors that the Chinese economy continues to have sound fundamentals and is worth investing in over the medium term.
China moves to protect consumers amid Evergrande saga
China's regulators have taken action to protect homebuying consumers from losing their life savings on unfinished projects. Growing local government oversight could deal a hard blow to real estate investment, especially in a cooling property market. It’s possible that the government could start providing some direct support to the property sector to ensure financial and economic stability.
China's electricity shortages may halt a slowing recovery
Much of China is experiencing an electricity shortage, prompting local governments to impose power cuts and rationing on industrial users. China’s northeastern industrial heartland is particularly affected, and there is widespread concern about the effects of a power disruption just before the Golden Week holiday begins on the National Day, 1 October.
Regional & Local Governments – China: Evergrande's credit distress and property sector slowdown will hurt RLG revenue, fiscal strength
The credit distress of property developer China Evergrande Group's (Ca negative), combined with regulatory tightening of land and property market policies, will weigh on land sales, hurting the fiscal strength of China's regional and local governments (RLGs).
Credit Conditions – China: Government actions on Evergrande likely to avoid financial, social instability but not preclude economic costs
China's (A1 stable) authorities will seek to avoid social and financial instability from the resolution of China Evergrande Group (Evergrande, Canegative), although significant costs will be borne across the economy.
China youth unemployment concerns authorities
Since China’s urban unemployment rate hit a record high of 6.2% in February 2020, the country has been focused on getting job numbers back on track. It has had some success. The headline unemployment figure is now almost back to its pre-pandemic level. It added nearly 9.4 million jobs in the first eight months of 2021.
Property – China: Outlook turns negative on tightened funding access
Our outlook for China's property sector is negative. This outlook reflects our expectations for the fundamental business conditions in the industry during the coming six to 12 months.
Regional & Local Governments – China: Growing role in supporting small and midsized banks raises RLGs' direct exposure to local financial sector risks
The policy has increased the role of RLGs in ensuring financial stability in their regions, and raised their direct exposure to SMBs.
APAC Outlook: No Straight Line to Recovery
The Asia-Pacific economy is slowing. Global trade is no longer rapidly accelerating and domestic economies throughout the region are hindered by tightened and lengthening movement controls as the Delta variant of COVID-19 spreads across the region. Incoming data for GDP growth shows clearly that the recovery from last year’s coronavirus-induced recession will not be a straight line.
Auto loan ABS – China | Coronavirus shock exposed used car loan risks
Used car loans performed significantly worse than new car loans during the coronavirus pandemic in China, which highlights that used car loans are much more risky during economic shocks in the country. Used car loan exposure is very low for Chinese auto loan asset-backed securities (ABS), which limits risks from these loans.
Property – China Increasing use of joint ventures weakens governance and complicates credit analysis
Chinese property developers will increasingly use joint ventures to expand their businesses. The number of rated developers using joint ventures (JVs) is increasing as developers pursue growth. Among other benefits, JVs allow developers and their partners to share costs. This is especially appealing now because regulators have tightened developers' access to funding.
Property – China Property Focus: Tight funding conditions will widen credit differentiation
National property sales growth will continue to slow down. Year-on-year national contracted sales value growth decelerated to 18.9% in June (three-month moving average) from 38.2% in May. We expect annualized national sales value growth to slow over the next 6-12 months.
Pedal to the Metal Price Hikes
Chinese authorities are trying to apply the brakes on runaway producer prices, but market forces may be enough to alleviate pressures. If consumer prices are materially affected, then a broader concern is that we are headed for a period of sustained high inflation in China and around the world.
China's Demographic Challenges in Perspective
China’s stable fertility rate at 1.6 will unlikely be significantly affected by the new three-child limit. The demographic dividend peaked in 2010; now demographic changes are an economic headwind. These demographic challenges are common across APAC.
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