A slowdown in China’s GDP growth to below 7 percent will not significantly weaken the creditworthiness of Taiwanese companies, but falling demand could increase price competition, Taiwan Ratings Corp (中華信評) said yesterday.
The deceleration in China’s economic growth over the past two years has led to overcapacity and intensified competition in many manufacturing segments. The automobile, steel, cement and chemicals sectors may come under more pricing pressures, the local arm of Standard & Poor’s said.
Taiwan Ratings expects China’s GDP growth to slow further next year, which could increase margin pressures for Taiwanese businesses that depend on China as their main destination for exports.
“Slower growth in China poses a real risk to corporate revenues, but the credit impact on Taiwanese companies is likely low, meaning a two-notch downgrade at most,” Taiwan Ratings credit analyst Raymond Hsu (許智清) said.
“That is because Taiwanese firms maintain strong capitalization and cash flow to absorb the impact of an economic adjustment,” he said.
“Sufficient liquidity in Taiwan’s financial market and low interest rates provide additional flexibility for the companies to counter business volatility in China over the next one or two years,” Hsu said.
China’s recent actions to stimulate domestic consumption could lift demand somewhat, but may not quickly restore major manufacturing sectors, he said.
The benefits from the cross-strait services pact may not be seen in time to offset the negative impact from an economic slowdown in China, he added.
Separately, Taiwan’s thin profit margins and intense competition may drive more local financial institutions to expand in China, but the pace of growth is likely slow, with limited profit contribution and manageable risks in the next few years, Taiwan Ratings said.
“Most financial service sectors in Taiwan will remain active in pursuing new business opportunities in China over the next two or three years, despite the different speed of deregulation in each service sector,” credit analyst Eunice Fan (范維華) said.
Relaxing political and trade barriers across the Taiwan Strait have facilitated this trend and the migration of many corporate clients into China has also lent a helping hand, she said.
However, local financial institutions maintain a prudent growth approach with manageable risk in China and should prevent an aggressive shift in risk profiles in the medium term, she added.
Taiwan Ratings expects financial institutions’ exposure in China to have a neutral rating impact over the next two or three years.