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Now Moody's is looking at downgrades for China's biggest companies

Photo by Guang Niu/Getty Images

Hot on the heels of placing China’s sovereign rating on watch negative earlier this week, Moody’s has announced additional ratings actions today, placing 38 Chinese state-owned enterprises (SOEs) on watch negative, a precursor to a potential ratings downgrade.

The companies impacted are household names, even outside of China, and include the likes of China Mobile, Citic Group, China State Construction Engineering and China Metallurgical Group.

The move follows similar moves from Moody’s towards 25 Chinese non-insurance financial firms on Wednesday, including some of the largest banks in the country such as ICBC, Bank of China, Agricultural Bank of China and China Construction Bank.

“The government’s financial strength may come under pressure if it takes on liabilities from troubled state-owned companies, while capital outflows have limited policy makers scope to stimulate the weakest economy in a quarter century,” Moody’s said in a statement.

While the decision implies a one-in-three chance that Moody’s may downgrade these firms in the months ahead, it was largely expected given the group cited increased stress in China’s SOE sector as a factor behind placing the nation’s sovereign rating on watch negative.

“The government’s balance sheet is exposed to contingent liabilities through regional and local governments, policy banks and state-owned enterprises (SOEs),” Moody’s wrote. “The ongoing increase in leverage across the economy and financial system and the stress in the SOE sector imply a rising probability that some of the contingent liabilities will crystallize on the government’s balance sheet.”

China’s government has pledged to reform its state-owned enterprises, particularly in the industrial sector given severe overcapacity, heavy levels of indebtedness and mounting operating losses.

Progress on this front will go some way to determining whether Moody’s will follow through with a ratings downgrade.

“(We) could downgrade the rating if we observed a slowing pace in the adoption of reforms needed to support sustainable growth and to protect the government’s balance sheet” says Moody’s. “Tangibly, this could happen if debt metrics weaken, contingent liabilities increase, or progress on SOE reform stalls.

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