Moody's: Slowing economy pressures revenue and leverage of China's non-financial corporates; but sector credit quality to diverge amid economic rebalancing

Moody's Investors Service says that China's (Aa3 stable) economic slowdown will pressure the profitability of the country's non-financial corporates into 2016, making debt deleveraging unlikely over the next 12-18 months, although continued monetary easing will provide some liquidity support.

"As China's economy continues to rebalance, the credit quality of its various sectors is starting to diverge," says Clement Wong, a Moody's Associate Managing Director.

"Corporates in the oil & gas, metals & mining and commodity trading sectors remain pressured by weak commodity prices and oversupply," says Wong, "but policy relaxation, lower input costs and rising consumption are buffering the negative impact from China's slowing economy on corporates in the auto, retail, property, construction and telecom-media-technology sectors."

Wong was speaking on the release of Moody's 2016 outlook presentation for Chinese non-financial corporates.

The slowdown in China's economy -- with GDP growth forecast at 6.3% in 2016, down from a forecast 6.8% for 2015 -- has led to an increase in downgrades and negative outlooks in particular in the high-yield space, suggesting another tough year ahead for these corporates.

While credit trends for investment-grade corporates are also deteriorating, Moody's notes that those in the private sector benefit from their stronger market positions and solid balance-sheet liquidity.

In addition, the rated state-owned enterprises benefit from their better access to domestic liquidity and strong levels of government support.

Liquidity risk remains low across the corporates it rates, says Moody's, due to broadly supportive onshore liquidity.

Specifically, domestic credit growth continues to outpace nominal GDP growth, with credit flows largely sustained by bank lending.

Liquidity is further supported by low offshore bond maturities for rated issuers, says Moody's, with a manageable amount of maturities through 2019 relative to total issuance.