INDEPENDENT ADVISORS | Staff Reporter, China

Here's how badly Chinese firms will be hit by China's slowdown

Weak credit profiles may worsen.

China's current economic slowdown is likely to contribute to weakening credit profiles for many of the country's major companies, according to Standard & Poor's Ratings Services' annual survey on China's top corporates published today.

Here's more from Standard & Poor's:

The report, titled "China Credit Spotlight: High Leverage And Slowing Growth Increase Top Corporates' Credit Risk," examines the credit profiles of 151 major Chinese companies from a pool of the largest domestic bond issuers and biggest revenue-earners, as well as companies that are representative of their industries.

Three-quarters of this year's sample comprises state-owned enterprises (SOEs), a decline from 88% in 2012 because we increased the number of private enterprises in the sample.

The report says that China top corporates' balance sheet leverage and profitability have deteriorated since 2008 as China's easy credit has fuelled an investment boom even as the economy was struggling to digest overcapacity in many industrial sectors.

"We believe the financial strength of the majority of the 151 corporates in our survey will weaken further in the next 12 months," said Standard & Poor's credit analyst Christopher Lee. "A sizeable minority with highly leveraged balance sheets and continued high investment appetites remain particularly vulnerable in the current slowdown."

The impact of the slowdown on China's industry sectors is likely to be uneven. While we ranked telecommunications and oil and gas as the two strongest sectors in the survey, the building materials, coal, construction and engineering, diversified, metal and mining (including steel), transportation, and utilities sectors are the weakest.

"Some of these sectors are struggling with excess capacity and depressed profitability," Mr. Lee said. "To promote consolidation in these industries, we believe the government may intervene to remove excess capacity by encouraging state-owned enterprises to merge and acquire weaker companies."

The report also analyses the impact of downside economic scenarios on 17 industry sectors. It notes that in a downside scenario of 6.8% real GDP growth in 2013 and 2014, to which Standard & Poor's assigns a 20%-25% chance of occurring, there is the potential for downgrades of one-to-two rating notches of companies in some industry sectors. In our base-case scenario, China's real GDP growth is 7.3% in both 2013 and 2014.

This article is part of our "China Credit Spotlight" series, which discusses the credit conditions for China's sovereign, key sectors, top 150 corporates, and top 50 banks.

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