China’s Covid Zero Position Could Exacerbate Corporate Debt Problems

China's Covid Zero Position Could Exacerbate Corporate Debt Problems

People line up to undergo nucleic acid tests for the COVID-19 coronavirus in the Myanmar border town of Ruili in southwest China’s Yunnan Province on July 5 2021.

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Rating giant S&P Global Ratings says China’s zero Covid prospect could worsen the debt situation of companies in the country, some of which are already in financial difficulty.

The company warned in a report last week that the global resurgence of Covid and China’s zero tolerance approach could further strain businesses if the outbreak continues to sweep away restrictions and disruption to mobility.

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

“High leverage, low cash flow, tight liquidity and volatile funding conditions are passing. And all of this is happening in the midst of unprecedented crisis events and regulatory measures, ”he said.

The need to manage recurring epidemic and foreclosure episodes as part of a zero Covid approach places an additional burden on businesses across the country, which have yet to fully recover and experience weak credit trends.

According to Our World in data, COVID cases in July and August across China peaked at over 110 cases for the 7-day moving average in August. This was a threshold not seen since January, when cases exceeded 120. Infections were under control before the July outbreak, dropping to seven cases in March for a 7-day moving average.

While the number of infections is still low compared to other major economies, China has shown zero tolerance to any increase in cases.

In August, the country closed a major terminal at its port of Ningbo-Zhoushan – the third busiest port in the world – after a worker was infected with Covid-19. Earlier in June, COVID infections disrupted southern China’s shipping platforms, including major ports in Shenzhen and Guangzhou – the first time China has suspended operations at ports due to cases of COVID.

Debt crisis of China’s largest companies

In response to the latest rebound in cases, the Chinese government has introduced measures, including mass testing in some cities, entry and exit checks in Beijing and other restrictions.

S&P Global Ratings said that while the measures were effective in reducing cases, they also showed that only a targeted response was causing disruption in large parts of the country.

The need to manage recurring episodes of epidemics and lockdowns as part of a zero COVID approach places an additional burden on businesses across the country, which have yet to fully recover and are vulnerable, according to the S&P report. Looking at credit trends.

China’s largest bad debt manager, Huarong, has battled failed investments, and after failing to report profits on time earlier this year, the market began to plunge as its bonds collapsed.

S&P Global Ratings said companies’ ratings in the future could be “more negative” if the outbreak continues in the country.

The rating company further identified broad areas of downside risk in terms of holding negative ratings. These include auto, real estate, media and entertainment finance vehicles, and local governments – companies owned by local governments in China that were established to finance public infrastructure projects.

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

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