Chinese State Firms' Debt Stress Flagged by Moody's Outlook Cut

Why Moody's Cut China's Rating Outlook

Debt strains at China’s state-owned enterprises are adding to concerns about the nation’s creditworthiness as leaders prepare for an annual parliamentary meeting.

Moody’s Investors Service cited risks posed by state firms in lowering the country’s credit-rating outlook to negative from stable Wednesday. “The ongoing increase in leverage across the economy and financial system and the stress in the SOE sector imply a rising probability that some of the contingent liabilities will crystallize on the government’s balance sheet,” it said in a report.

The National People’s Congress meets from March 5 to lay out economic development targets, after authorities said in September they would reform “zombie enterprises,” while encouraging a “blending” between state and private capital. Rising SOE leverage raises risks of a sharper slowdown in economic growth as more money will be needed to service the debt-loads, Moody’s said in the report. SOEs have seen debt jump to 62 percent of assets from 55 percent in 2007, according to estimates from Shi Kang, an associate economics professor at the Chinese University of Hong Kong.

‘Warning Shot’

“The revision of outlook is more or less a warning shot,” said He Xuanlai, Singapore-based credit analyst at Commerzbank AG. “Moody’s focus on lack of state-owned enterprise reform steps is fully justified, so the impact is medium- and long-term. Of course it will dent investor’s confidence for Chinese companies’ bonds.”

Research by Bloomberg Intelligence last year showed that China could have achieved economic growth exceeding 8 percent in the first half of 2015 had the nation’s bloated and inefficient state-owned enterprises kept pace with private firms. Debt at state firms ballooned following government stimulus spending after the global financial crisis.

Authorities have vowed to channel more private investment into state firms as the nation aims to carry out the most sweeping overhaul of the companies that dominate the $10 trillion economy in two decades. Concern has spread that the cooling economic expansion could delay the plans.

SOE reforms have been lagging behind as the role of state firms in supporting the job market has been more important than ever amid the economic slowdown, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore.

“Moody’s move ahead of NPC may show the rating agency may lose patience after China scaled back some reform measures to support currency stability amid currency turmoil,” Xie said. “It also shows there might be increasing concern about the policy implementation risk as there are signs of policy inconsistency.”

— With assistance by Lianting Tu, and Judy Chen

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