Japan bright but China risk hits growth: S&P

Asia-Pacific credit conditions have weakened slightly as a result of softer economic traction and increased downside risk in China, says Standard & Poor’s Ratings Services in its third-quarter Credit Conditions Committee report.

The report published yesterday said real growth of gross domestic product in a number of countries had generally been slower than S&P had anticipated earlier in the year, while Japan has been surprisingly on the upside.

“The main risk factor for the region is a continued slowdown in China, where real GDP growth is threatening the official target of 7.5 per cent for 2013,” said credit analyst Andre Palmer. 

“For the year ahead, we see activity in China picking up only modestly under our base case, forecasting 2013 real GDP growth at 7.3 per cent and remaining at that pace next year. In our downside scenario we forecast China’s real GDP growth falling to 6.8 per cent in 2013 and 2014. Under our ‘hard downside’ scenario, real GDP growth falls more sharply, to 6.5 per cent in 2013 and 5.0 per cent in 2014.”

The report looks at the macroeconomic environment, in which the China slowdown is being felt across the region, plus the region’s financing conditions, whereby S&P believes that the financial environment should continue to support current credit conditions – at least for now.

“The recent performance of the newly industrialised economies of Hong Kong, Taiwan, Korea and Singapore could benefit the most from any gradual improvement in the global economy,” said the report, titled “Credit Conditions: Increased China Downside Risk Dampens Asia’s Growth”. 

“The more domestically led Asean economies, headed by the Philippines and Indonesia, continue to outperform the more trade-dependent newly industrialised economies.“Japan has been a bright spot for the region, as the initial effects of ‘Abenomics’ appear to be positive. Japan’s real GDP growth rose by an annualised 3.5 per cent [quarter on quarter] in the first period, led by a strong bounce in investment.”

Despite the lower-than-expected economic growth, S&P sees the current growth forecasts, balance-sheet conditions, capital management, and liquidity of companies broadly supportive of current credit conditions and their current ratings and outlooks. However, it continues to monitor cyclical companies that are exposed to high capital commitments and any refinancing requirements or currency exposures. 

Importantly, it said, the interconnectivity of economies and capital flows, and the volatility of markets make economies and entities in the region vulnerable to significant regional and global risks. 

The ratings agency continues to see euro-zone developments, US fiscal policy, and a slowing Chinese economy as the primary risks to credit conditions in the region.