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2017 Annual Greater China Corporate Default Study and Rating Transitions

Highlights

One company defaulted in Greater China in 2017, the same as in 2016, compared with a high of six defaults in 2015. The one-year speculative-grade default rate in 2017 was 0.19%.

The tally of corporations rated by S&P Global Ratings in Greater China (China, Hong Kong, Macau, and Taiwan) continued to grow rapidly in 2017, adding 63 issuers--an increase of 14% from 2016.

Ratings in Greater China continue to lean toward the investment-grade category, which tends to experience far fewer rating transitions than the speculative-grade segment. Nearly 74% of credit ratings in 2017 were unchanged, though among those that did change, downgrades were twice as common (11.3%) as upgrades (5.2%).

The 2017 one-year Gini coefficient for rated Greater China corporate issuers was 86.94%, compared with 82.39% globally. This shows the credit ratings' strong ability to differentiate credit risk in the region. State-owned enterprises (SOEs) showed a very high Gini coefficient of 98.94%, whereas non-SOE companies had a Gini coefficient of 83.08%.

The tally of corporations rated by S&P Global Ratings in Greater China (China, Hong Kong, Macau, and Taiwan) continued to grow rapidly in 2017, adding 63 issuers--an increase of 14% from 2016. Ratings in Greater China continue to lean toward investment grade ('BBB-' or higher), with a median rating of 'BBB', compared with a median rating of 'BB' in the U.S. Approximately 80% of 'BBB' rated issuers in Greater China did not experience rating changes within one year, on average, between 2000 and 2017, compared with about 60% of 'BB+' rated issuers. This aligns with our expectation of comparatively stable credit quality in 2018 for the Greater China issuers rated by S&P Global Ratings.

However, a number of key risks remain--namely, deleveraging, trade tensions, and growth of high-risk assets. Deleveraging has resulted from China's rapid credit growth over the past several years, which has been deemed unsustainable; unwinding and reducing leverage will require delicate care to avoid market destabilization. A combination of a strong dollar and rising interest rates in the U.S. may also contribute to asymmetric credit outflows from Greater China, which could exacerbate the deleveraging risk, since utilizing external capital is one of the Chinese government's tools to help stabilize the process of deleveraging. Additionally, high debt leverage in the corporate sector may compound this risk.

Meanwhile, escalating trade concerns do not seem to be abating as Washington and Beijing continue to trade tariffs on each other's goods and services. Further, there has been some grow 

th of new issuers in the speculative-grade (rated 'BB+' and below) segment, which is sizably more sensitive to macro shocks than the investment-grade category. As macro risks become more pronounced, these issuers are more likely to be downgraded, or even default, due to these sensitivities.

China's prolonged period of strong credit growth has increased its economic and financial risks, and S&P Global Ratings thus lowered its sovereign credit ratings on China to 'A+/A-1' from 'AA-/A-1+' on Sept. 21, 2017. The outlook is stable, reflecting S&P Global Ratings' view that China will maintain its robust economic performance and improved fiscal performance in the next three to four years.

In this study, S&P Global Fixed Income Research examines the ratings performance of 861 Greater China-based issuers rated by S&P Global Ratings. Entities included in this study are those with business operations in Greater China, regardless of the country in which they are incorporated. In a number of instances, entities included in this study are incorporated in foreign tax havens like the Cayman Islands. While S&P Global Ratings did rate issuers in Greater China prior to 2000, we limited the scope of analysis to issuers rated from 2000-2017. The statistics we present in this study refer only to the corporate ratings universe, which includes financial and nonfinancial entities in Greater China. Our methodology and the definitions of the terms we use in this study are in Appendix I.

Our study found that higher ratings correspond with stronger ratings stability for both state-owned enterprise (SOE) and non-SOE issuers. Due to their strong relationship with the sovereign, however, SOE issuers in Greater China had slightly lower stability rates across most rating categories in 2017, after the downgrade of China had knock-on effects for a number of SOE corporate issuers.

As of the end of 2017, 69% of rated issuers in Greater China were rated investment grade, compared with 51% globally, 44% in the U.S., and 59% in Europe. This distinction is particularly important in China because ratings also correspond strongly to the cost of debt: The higher the rating, the lower the cost of debt. Issuers in Greater China have had an average yield to maturity at initial issuance of just 3% in the 'A' rating category, 3.9% in the 'BBB' rating category, and 6.4% in the 'BB' rating category since 2013.

Higher-rated issuers tend to issue longer-term debt to take advantage of this lower cost of capital. In the same period, investment-grade issuers in Greater China averaged seven years for their new issuance terms, compared with just four years for speculative-grade issuers. This lower cost of financing and longer maturities help issuers mitigate default risk as well as stabilize transition rates.

In line with global trends, ratings continued to serve as effective indicators of relative credit risk in Greater China in 2017. Our study of corporate defaults in Greater China identified a clear negative correspondence between ratings and defaults: The higher the issuer credit rating, the lower the observed default frequency.

The one-year Gini ratio--a measure of the relative ability of ratings to differentiate risk--was 86.94% in Greater China. This signifies a strong ability of ratings to differentiate relative credit risk across the ratings spectrum. The three-year Gini ratio for Greater China was 82.70%. By comparison, the global one-year Gini ratio was 82.39%, and the global three-year Gini ratio was 75% (see table 1). Gini ratios are measures of the rank-ordering power of ratings over a given time horizon. They show the ratio of actual rank-ordering performance to theoretically perfect rank ordering (for details on the Gini methodology, refer to Appendix III).