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Press Release: S&PGR Lowers China's BICRA To Group '6'

22 Sep 2017 5:01 am
 
 
The following is a press release from Standard & Poor's: 
 
HONG KONG (S&P Global Ratings) Sept. 22, 2017--S&P Global Ratings said today 
that it has revised its classification of the banking sector of China to group 
'6' under its Banking Industry Country Risk Assessment (BICRA) from group '5'. 
This follows a further increase in China's private sector debt leverage and 
resultant deterioration in credit risks in the economy. That's according to a 
report, titled "Banking Industry Country Risk Assessment: China," that S&P 
Global Ratings published today. 
 
Rapid domestic credit expansion through regular and shadow banking has pushed 
up China's debt leverage over the past few years, and we expect it to increase 
further. The country's ratio of nonfinancial and nonpublic debt to GDP is very 
high relative to the country's GDP per capita. According to our calculation, 
China's private sector debt-to-GDP ratio was 162.5% at end-2016. Strong 
infrastructure investment and property-related borrowing remain the major 
causes for the deterioration in China's debt leverage. The credit binge has 
also fueled a run-up in China's property prices in recent years. 
 
In our view, the elevated debt leverage and the risk of a possible correction 
in property prices subject China's banking industry to heightened credit risks 
in the economy and outweigh potential benefits from China's economic 
resilience. China's private sector debt growth continues to outpace nominal 
GDP growth. This is despite a steady deceleration in the growth in corporate 
credit since 2014 due to dampened investment sentiment amid slowing economic 
growth and the effect of a debt swap for China's local government financing 
platforms (LGFPs). 
 
That said, China has experienced economic reflation since the third quarter of 
2016, and it has taken numerous policy initiatives to cut industrial 
overcapacity and facilitate corporate deleverage. These factors have 
contributed to a strong recovery in corporate profitability. As such, credit 
metrics for the banking sector have been significantly better than we expected 
over the past 12 months. 
 
China's strong customer deposit base and rapidly deepening domestic capital 
market continue to underpin the banking sector's solid funding profile. This 
is despite faster growth in credit than in deposits that is undermining the 
sector's funding metrics. China's domestic savings are still more than enough 
to finance domestic credit offtake. 
 
We view China's corporate bond market to be broad and deep enough to enable 
domestic issuers to tap long-term wholesale funding. In our view, China's 
newly launched Bond Connect Scheme and other reform initiatives could further 
broaden the institutional investor base by attracting global investors to the 
onshore market. 
 
We believe Chinese banks' significant issuance of wealth management products 
will continue to undermine the sector's accounting transparency and challenge 
regulatory effectiveness. In our view, China will continue to overhaul its 
regulatory framework for shadow banking, following the announcement on July 
15, 2017, that a high-level Financial Stability And Development Commission 
will be set up under the State Council. 
 
Prevalent state ownership in the banking sector could still hinder proper risk 
pricing, in our view. While the government has been promoting shareholding 
reforms to increase private ownership in Chinese banks and has been granting 
new licenses to private-owned banks, we believe the government will maintain a 
tight grip over major banks to ensure credit to its preferred economic 
segments and social projects. 
 
We view China's economic risk trend as stable after the lowering of the 
economic risk assessment. In our view, potential credit losses from disorderly 
deleveraging are unlikely to be worse than our current assessment. We believe 
a hard landing for the Chinese economy is very unlikely in the next two years. 
We expect the government to help limit the losses for the banking industry 
despite the elevated private sector debt leverage. Our view reflects its 
continuous efforts to stabilize corporate debt leverage, assume certain credit 
losses through LGFP debt swaps, and control property price run-ups. 
 
The industry risk trend is stable. On top of China's strong systemwide funding 
and the regulatory overhaul of shadow banking supervision, we expect banking 
regulators to stay vigilant and responsive to an economic slowdown and any 
unintended consequences of financial sector deleveraging. We view China's 
regulatory overhaul of shadow banking, interest-rate liberalization, and 
rapidly deepening domestic debt capital market as positive developments for 
the sector. However, we believe any material improvement in the sector's 
information risk and market distortions is unlikely in the next one or two 
years. 
 
BICRA Score Snapshot 
                                   SCORE 
                              To            From 
BICRA*                        6             5 
Economic Risk*                7             6 
Economic Risk Trend           Stable      Negative 
Economic Resilience(4)         3             3 
Economic Imbalances(4)         4             4 
Credit Risk In The Economy(4)  5             4 
 
Industry Risk*                5             5 
Industry Risk Trend           Stable        Stable 
Institutional Framework(4)     4             4 
Competitive Dynamics(4)        4             4 
Systemwide Funding(4)          1             1 
 
*On a scale of 1 (lowest risk) to 10 (highest risk) 
(4)On a scale of 1 (lowest risk) to 6 (highest risk) 
 
Only a rating committee may determine a rating action and this report does not 
constitute a rating action. 
 
The report is available to subscribers of RatingsDirect at 
www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a 
RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 
212-438-7280 or sending an e-mail to research_request@spglobal.com. Ratings 
information can also be found on the S&P Global Ratings' public website by 
using the Ratings search box located in the left column at 
www.standardandpoors.com. Members of the media may request a copy of this 
report by contacting the media representative provided. 
 
Primary Credit Analyst: Qiang Liao, PhD, Beijing (86) 10-6569-2915; 
                        qiang.liao@spglobal.com 
Secondary Contact: Harry Hu, CFA, Hong Kong (852) 2533-3571; 
                   harry.hu@spglobal.com 
Sovereign Analyst: KimEng Tan, Singapore (65) 6239-6350; 
                   kimeng.tan@spglobal.com 
 
 
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