Coface Israel warns on exports to China

Carmine Mandola
Carmine Mandola

Credit insurance co Coface has downgraded China to A4 following equity declines and a rise in debt.

"The Problems in China are not only in the Chinese stock markets, but also in real activity. The level of corporate debt in the Chinese economy is a cause for concern" said Coface Israel Country Manager Carmine Mandola. "We can already see that Israeli exports to China decreased by almost 15%, compared with last year".

According to Mandola, China’s rating has been downgraded by Coface to A4. "The country's level of private debt is increasing, primarily because of companies. It stood at 207% of GDP in 2014, compared with 130% in 2008 (according to the IMF). This level is considered worrying and is far higher than the levels noted in other emerging countries. As such, the solvency of companies in fragile sectors could be affected. The cement, chemicals and steel segments associated with infrastructure spending are weakened by their overcapacity".

What are the Risks in China? Coface observes that this market correction can be seen as a healthy development after such a sharp rally; but volatility and equity price deflation pose risks.

The heavy use of margin finance could lead to a downward spiral as traders sell shares to meet margin calls while the loss of upward momentum has eliminated the main reason for buying shares. The impact could be higher if share losses cause a wave of defaults for those who borrowed money to invest. According to Goldman Sachs margin financing in the market is equivalent to 3.5% of GDP “easily the highest in the history of global equity markets”.

Real activity could be affected by this downturn as brokerages and trading firm’s activity has been a direct support to the economy, the wealth effect could weigh on household consumption in a context of slowing economy and consumer confidence could be hit. Indeed, unlike other large economies, retail investors (rather than institutional) dominate in China with 80% of the market.

There could be an impact on domestic and international confidence in the cabinet’s reform agenda if the market doesn’t soon stabilize. Nevertheless just as government support has been a key driver of the high surge in equities, the authorities have taken a range of extraordinary measures to restore investor confidence including the suspension of IPOs by 28 companies.

Coface added that the China Securities Regulatory Commission said that the PBoC would “uphold market stability” by providing liquidity to a state entity that makes margin financing available to brokers. But there is a high risk of vicious cycle as using monetary easing to support the stock market is debatable. The day following the announcement of the measures the 6th of July the recovery of Chinese stocks has been uneven. Shanghai Composite Index gained 2.4% but the Shenzhen Composite ended 2.7% lower. Since then, Chinese markets have continued to fall. The government credibility now appears to be at stake in the performance of the market while the authorities intend to allow market forces to drive the economy notably by stepping up the pace of capital account liberalization.

The Coface Group, is a worldwide leader in credit insurance, offering companies around the globe solutions to protect them against the risk of financial default of their clients, both on the domestic market and for export.

Carmine Mandola
Carmine Mandola
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