Coface downgrades China’s country risk rating

International credit insurer Coface has downgraded China’s country risk rating from A3 to A3 negative watch.

The Coface country risk assessment evaluates the average credit risk of companies in a given country. The evaluation is based on economic, financial and political data and takes into account Coface’s debtor payment experience, as a credit insurer, of businesses in that country.

Coface cites the following reasons:

• Coface’s payment experience regarding debtor defaults is deteriorating.
• Coface is concerned about the level of private sector debt. “Given the expansion of shadow banking, it is difficult to assess precisely the level of private sector debt,” says Coface. However the IMF estimates that private sector debt was around 207% of GDP in early 2014, while in 2008 it was significantly lower at 130% of GDP. This is substantially higher than in emerging economies (particularly in other BRICS countries) and the number of non-performing loans are rising.
• Bearing in mind the economic slowdown, the solvency of more exposed businesses must be watched.
• The sectors most affected will be those experiencing sizeable overcapacity, such as the cement and steel industries that are linked to the construction sector. Indeed the property market is showing signs of weakness, with real estate investment slowing and property prices declining.

Coface has raised the country risk rating of the Czech Republic from A4 to A4 positive watch, Portugal from B to B positive watch, Sri Lanka from C positive watch to B and Vietnam from C to C positive watch.