China SOEs to lower leverage gradually through 2018, says Moody’s

Government reform programmes to increase EBITDA and curb debt growth

A report from Moody's Investors Service says that two thirds of the 53 Chinese state-owned enterprises (SOEs) that it rates will show lower leverage levels in 2018 versus 2016. In particular, debt/EBITDA as adjusted by Moody's will fall.

“The improvement will come as the SOEs grow EBITDA and show slower debt growth,” says Kai Hu, a Moody's senior vice president.

The report points out that the Chinese government's reform measures underpin the continuing reduction in leverage levels. Specifically, the reforms related to SOEs, which aim to increase their efficiency and profitability, as well as supply-side reforms, which are targeted at lowering leverage and costs for Chinese corporates and removing excess capacity in certain industries. Both reform programmes will increase EBITDA and curb debt growth.

As for SOEs in the commodity sectors, Moody's explains that their stronger standalone credit quality will help them withstand possible future downturns in commodity prices.

The 2016-17 recovery in such prices has boosted the EBITDA for SOEs in the metals and mining, oil and gas, and agriculture and food sectors. While Moody's price assumptions for commodities in 2018 are moderately lower than the average for 2017, the SOEs' cost savings, capital spending cuts and more conservative financial policies will enable them to continue deleveraging through 2018. In addition, the improving supply-demand balance for commodities and continued GDP growth in China will reduce price volatility.

However, leverage will increase for one-third of Moody's-rated Chinese SOEs. These comprise seven power and gas utilities that cannot pass increased fuel prices to customers in a timely manner, or demonstrate large planned capital expenses, or both; two SOEs in the property sector that have increased their land purchases; and three SOEs that made large acquisitions in 2017.