China’s State Firms May Default on More Loans: Moody’s

Loan defaults at China’s state-owned enterprises may increase as growth in the world’s second-biggest economy slows, according to Moody’s Investors Service.

Risks are greatest in industries with excess production capacity, Kai Hu, a senior credit officer at the rating company, said at a conference in Shanghai today. Economic growth will cool from “slightly below 7.5 percent” this year to about 7 percent in 2015, Thomas Byrne, the credit assessor’s head of Asia-Pacific sovereign risk group, said at the gathering.

The People’s Bank of China, which cut its benchmark lending rate 40 basis points to 5.6 percent last month, must balance efforts to ease access to cash with steps to stem bad loans that soared the most since 2005 last quarter. Regulators stepped up efforts to curb local-government debt on Dec. 8, prompting borrowing costs to jump and companies to cancel or postpone at least 46.6 billion yuan ($7.5 billion) of note sales this week.

Moody’s expects “a gradual slowdown over the medium term” in China’s economic growth to around 6 percent a year by 2018, Byrne said. The country’s deleveraging and rebalancing, as it shifts the focus of its economy to consumption from smokestack industries, will be gradual with no significant boost from external demand, he said.

Credit-Market Stress

In the latest signs of concern in China’s credit markets, the extra yield companies rated AA must pay to sell bonds due in seven years over similar-maturity government notes has surged 51 basis points this week to a two-month high of 263 basis points.

The seven-day repurchase rate, a gauge of interbank funding availability, rose as much as 17 basis points today to a four-month high of 3.81 percent, a weighted average compiled by the National Interbank Funding Center shows.

The PBOC published draft rules of an insurance scheme for bank deposits last month, a move that would clear the way for the removal of caps on savings rates that banks can offer. Increased competition for funds would lead to higher rates.

In the long term, the government’s support for smaller lenders will gradually weaken once the insurance system is put into place, said Christine Kuo, a senior credit officer at Moody’s.

— With assistance by Judy Chen

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