Moody's poll shows muted China growth expectations, but financial crisis unlikely

Moody's Investors Service says that poll respondents at offshore credit briefings in London, Paris and New York in October identified rising corporate distress and increased policy uncertainty as the greatest risks to growth for China (Aa3 stable) in 2016.

Poll respondents further expect economic activity to slow, with GDP growth of 6.5% or lower in 2016.

In particular, asset quality deterioration in industries showing overcapacity is a concern for Chinese banks. However, the majority of those polled believe that the Chinese authorities possess the tools to avert a banking crisis, or that a crisis would take much longer than 12-18 months to materialize.

Moody's conclusions are contained in its just-released report "China Credit: Heard from the Market: Muted Growth Expectations, but Financial Crisis Unlikely". Polling results were taken from 130 respondents in London, Paris and New York.

The polling results showed broad consensus that corporate leverage will continue to rise next year, challenging corporates, even if at a moderate pace. Coupled with a 0%-5% depreciation of the renminbi against the US dollar and expectations of slower growth, this situation points to a challenging backdrop for Chinese corporates.

The poll results largely mirror Moody's forecast for a gradual slowdown in China, with real GDP growth of 6.3% in 2016, down from just under 7% in 2015.

According to Moody's, the sustained slowdown in headline expansion reflects the challenges associated with China's ongoing structural rebalancing and, in particular, the policy trade-offs between implementing long-term reform and market liberalization and short-term macroeconomic stability.

Similarly, Moody's also sees credit challenges for rated corporates from elevated leverage, although refinancing is relatively low for most.

Meanwhile, the offshore market remained undecided on the attractiveness of China's nascent municipal bond market. On average across the three cities, 25% of those polled saw the sector as attractive, while 36% disagreed and 39% remained undecided.

Concerns surrounding contingent liabilities from state-owned enterprises and local government financing vehicles were viewed as the most pertinent risks to regional and local governments, with weaker revenue from land sales also seen as a major challenge.