Public Health

China’s zero-covid stance could worsen corporate debt problems

People are queuing in the Myanmar city of Ruili in southwest China’s Yunnan Province on July 5, 2021 to undergo a nucleic acid test for the Covid-19 coronavirus.

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China’s zero-covid approach could worsen the debt situation of the country’s companies, some of which are already in financial distress, says rating giant S&P Global Ratings.

The company warned in a report last week that the global resurgence of Covid and China’s zero tolerance approach could continue to weigh on businesses if outbreaks continue to lead to mobility impairments and disorders in general.

“The recent COVID-19 resurgence in China came at a time when risks for Chinese companies are increasing,” wrote analysts at S&P Global Ratings.

“Higher debt, weaker cash flows, tighter liquidity and volatile financing conditions are persistent. And all of this is happening amid unprecedented emergencies and regulatory action, ”they said.

The need to manage recurring episodes of outbreaks and bans as part of the zero-COVID approach is putting additional strain on companies in the country that have not fully recovered and are weakening credit trends.

Covid cases across China spiked in July and August, peaking at over 110 cases for the 7-day moving average in August, according to Our World in Data. This was a range not seen since January when cases topped 120. Infections had been under control prior to the July surge and fell to just seven cases for the 7-day moving average in March.

While the number of infections is still small compared to other major economies, China had shown no tolerance for an increase in cases.

In August, the country closed a key terminal at its port of Ningbo-Zhoushan – the world’s third largest port – after a worker was infected with Covid-19. In early June, Covid infections sparked disruption at shipping hubs in southern China, including major ports in Shenzhen and Guangzhou – the first time China has shut down ports due to Covid cases.

Debt crisis in China’s largest companies

In response to the recent recovery in cases, the Chinese government took a series of measures, including mass tests in some cities, entry and exit controls in Beijing, and other restrictions.

S&P Global Ratings said that while the measures were effective in containing cases, they also showed that even a targeted response led to disruption across much of the country.

“The need to manage recurring episodes of outbreaks and bans as part of the zero-COVID approach is putting additional strains on companies in the country that have not fully recovered and are seeing debilitating credit trends,” the S&P report said .

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China’s largest bad debt manager Huarong is grappling with failed investments and after failing to submit his profits on time earlier this year, he sparked a market flight when his bonds collapsed.

S&P Global Ratings said corporate ratings could “continue to fall” in the future if outbreaks continue to disrupt the country.

The rating company identified major sectors with downside risk in the form of negative ratings. These include automobiles, real estate, media and leisure, and local government funding vehicles – local government-owned companies in China that were set up to fund public infrastructure projects.

– CNBC’s Yen Nee Lee contributed to this report.

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