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China's Post-COVID Conditions Polarize Fundamentals

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China's Post-COVID Conditions Polarize Fundamentals

Many investors see COVID-19 as a shock to corporate China that has strained credit metrics and squeezed liquidity. The reality is more nuanced. Our rating actions on Chinese firms are actually netting out at about even. Beneath that neutral surface, credit quality is polarizing, with clear winners and losers. S&P Global Ratings expects Chinese issuers' credit standing to continue to diverge into 2021, as entities navigate external shocks with varying skill.

At one extreme, recurring waves of COVID outbreak globally have fueled fears of severe demand contractions and broad corporate distress.

At the other extreme, massive stimulus in China and the country's quicker recovery have led to expectations that rising liquidity will lift entities, and that COVID's effect will be limited.

Such views have swung market sentiment from highs to lows, with investors sometimes overlooking the specific capacity of a firm to adapt to COVID. Some entities have gained from rounds of stimulus, while others have lost market share or have simply adjusted poorly to fast-moving conditions.

Positive Polarization

Investment-grade names that have adapted well to the pandemic include China Tourism Group Corp. Ltd. We revised our outlook on the group to stable from negative in September 2020 on the view it was recovering faster than we previously expected. This reflected the firm's quick shift in focus to online sales, and swift cost cutting on rent and airport concessions.

We changed the outlook on our rating on JD.com Inc. in the same month to positive from stable because it increased product diversity, raised its online penetration, and improved its market positioning. This came as more consumers shopped online under COVID (see table in the Appendix).

Some speculative-grade entities have also stood out, showing more sales and earnings resilience, and an ability to curtail spending during a crisis.

We revised the outlooks on Country Garden Holdings Co. Ltd., Shimao Group Holdings Ltd., and Seazen Group Ltd. to positive, in September.

We revised the outlook on Jingrui Holdings Ltd. to stable from negative in September, and upgraded Jiangsu Zhongnan Construction Group Co. Ltd. to 'B+' from 'B' in October. In both cases, the actions reflected creditworthiness that had improved above the entities' pre-COVID levels.

These rating changes came not just from the stronger speculative-grade firms, but also the smaller entities rated 'B-' to 'B+'. Size is not everything, and prudence is present across the credit spectrum in China.

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Negative Polarization

At the other end of the polarization dynamic, we see issuers belonging to sectors that are still grappling with the effects of the pandemic.

For example, we downgraded Jinjiang International Holding Co. Ltd. to 'BBB-' in October, and 361 Degrees International Ltd. to 'B-', in September. The former belongs to the travel sector, and the latter to bricks-and-mortar retailing. COVID has hit both sectors hard. Entities will likely encounter protracted slumps in their markets, even with the help of ample stimulus.

Those that entered the pandemic with high leverage, and have yet to significantly curtail their growth ambitions, have also seen ratings come under pressure.

These include China Evergrande Group, Yanlord Land (HK) Co. Ltd. and E-House (China) Enterprise Holdings Ltd., on which we revised the outlooks to negative in September.

Lastly, we remain mindful of the effects of other exogenous shocks, such as U.S. trade sanctions. The challenging operating environment under COVID compounded these effects, leading to negative rating actions. We put Semiconductor Manufacturing International Corp. on CreditWatch with negative implications in October with such circumstances in mind.

Exceptions--Idiosyncratic Risks

The pandemic is not always the most important risk driver. Company-specific risks unrelated to COVID can also trigger positive or negative rating actions. The former includes our removal of Sunshine 100 China Holdings Ltd. from CreditWatch with negative implications after the company secured a loan and sold a project.

The latter includes Weibo Corp.'s placement on CreditWatch with negative implications following the privatization of its parent, SINA Corp. We can also point to the downgrade of ENN Energy Holdings Ltd. to 'BBB' on a restructuring that will make ENN Ecological Holdings Co. Ltd. its controlling shareholder.

Defaults And Its Effects

At the distressed end of the spectrum, for which government stimulus has provided little to no help, defaults are rising.

Recent developments in landmark cases such as Tewoo Group Co. Ltd. and Peking University Founder Group showed that risks can emanate from bond structures (see "Landmark China Default Tests Two Popular Bond Structures," published Sept. 17, 2020, on RatingsDirect).

High-profile failures of state-owned enterprises (SOEs), such as Brilliance Auto Group, Qinghai Provincial Investment Group, and Tianjin Real Estate Group, showed the government may not always bail out its SOEs or improve post-default recovery, even with a massive stimulus underway.

These cases led to more polarization of bond pricing among Chinese corporates, including the SOEs (see "Rising Funding Costs May Tip China's Weaker SOEs Into Default," Sept. 15, 2020).

Polarization At The Macro Level

China's COVID response has also driven divergence at the industry level.

Government stimulus has helped some Chinese industries. For example, we project China will be the world's only auto market to recover to 2019 volumes by 2022 (see "Global Auto Sales Forecasts: Hopes Pinned On China," Sept. 17, 2020).

In the capital goods sector, we note that sales of key machinery and trucks have been growing at 50%-plus year on year since March 2020, raising the prospect of a moderate correction next year (see "China's Cyclical Capital Goods Makers Brace For Downcycle," Oct. 12, 2020).

The government's accelerated infrastructure spending is lifting rated names in the engineering and construction sector. We expect such entities to deliver 8%-10% revenue growth this year (see "China's Infrastructure Push Plucks E&C Firms From COVID Lows," Sept. 30, 2020).

The effects of the pandemic--and related policies and stimulus--should linger for a long time. We note that conditions are not uniformly good or bad, but they are polarizing, and will likely be a key ratings factor well into 2021.

Appendix

Recent Rating Actions On Chinese Firms
Date To From Pre-COVID*
Positive actions

China Tourism Group Corp. Ltd.

Sept. 15, 2020 A-/Stable/-- A-/Negative/-- A-/Stable/--

JD.com Inc.

Sept. 3, 2020 BBB/Positive/-- BBB/Stable/-- BBB/Stable/--

Country Garden Holdings Co. Ltd.

Sept. 2, 2020 BB+/Positive/-- BB+/Stable/-- BB+/Stable/--

Shimao Group Holdings Ltd.

Sept. 4, 2020 BB+/Positive/-- BB+/Stable/-- BB+/Stable/--

Seazen Group Ltd.

Nov. 2, 2020 BB/Positive/-- BB/Stable/-- BB/Stable/--

Seazen Holdings Co. Ltd.

Nov. 2, 2020 BB/Positive/-- BB/Stable/-- BB/Stable/--

Jiangsu Zhongnan Construction Group Co. Ltd.

Oct. 8, 2020 B+/Stable/-- B/Stable/-- B/Positive/--

Jingrui Holdings Ltd.

Sept. 28, 2020 B/Stable/-- B/Negative/-- B/Negative/--

Sunshine 100 China Holdings Ltd.

Sept. 22, 2020 CCC-/Negative/-- CCC-/Watch Neg/-- CCC+/Negative/--
Negative actions

Weibo Corp.

Oct. 13, 2020 BBB/Watch Neg/-- BBB/Stable/-- BBB/Stable/--

ENN Energy Holdings Ltd.

Sept. 8, 2020 BBB/Stable/-- BBB+/Watch Neg/-- BBB+/Watch Neg/--

Jinjiang International Holding Co. Ltd.

Oct. 12, 2020 BBB-/Stable/-- BBB/Negative/-- BBB/Stable/--

Semiconductor Manufacturing International Corp.

Oct. 7, 2020 BBB-/Watch Neg/-- BBB-/Positive/-- BBB-/Stable/--

Yanlord Land Group Ltd.

Sept. 30, 2020 BB-/Negative/-- BB-/Stable/-- BB/Watch Neg/--

E-House (China) Enterprise Holdings Ltd.

Sept. 21, 2020 BB-/Negative/-- BB-/Stable/-- BB/Stable/--

China Evergrande Group

Sept. 24, 2020 B+/Negative/-- B+/Stable/-- B+/Stable/--

361 Degrees International Ltd.

Sept. 1, 2020 B-/Negative/-- B+/Negative/-- BB-/Negative/--

GCL New Energy Holdings Ltd.

Sept. 14, 2020 CCC-/Watch Neg/-- CCC/Negative/-- B-/Negative/--
Affirming actions

China Southern Power Grid Co. Ltd.

Sept. 18, 2020 A+/Negative/-- A+/Negative/-- A+/Negative/--

COFCO (Hong Kong) Ltd.

Sept. 18, 2020 A-/Stable/-- A-/Stable/-- A-/Stable/--

21Vianet Group Inc.

Sept. 3, 2020 B/Stable/-- B/Stable/-- B+/Stable/--

China Dili Group

Sept. 14, 2020 B-/Stable/-- B-/Stable/-- B-/Stable/--
*As of Jan.1, 2020. Source: S&P Global Ratings.

Related Research

This report does not constitute a rating action.

China Country Lead:Charles Chang, China Country Lead, Hong Kong + 852-2912-3028;
charles.chang@spglobal.com
China Country Specialist:Chang Li, China Country Specialist, Beijing + 86 10 6569 2705;
chang.li@spglobal.com
Secondary Contacts:Alex Yang, Hong Kong + 852 25333057;
alex.yang@spglobal.com
Boyang Gao, Beijing (86) 10-6569-2725;
boyang.gao@spglobal.com

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