People are queuing to undergo Covid-19 coronavirus nucleic acid testing in the city of Ruili, which borders Myanmar, in southwestern Yunnan Province, on July 5, 2021.
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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 difficulties, according to rating giant S&P Global Ratings.
The firm warned in a report last week that the global resurgence of Covid’s and China’s zero-tolerance approach could increase corporate pressure if outbreaks continue to cause mobility restrictions and broadly disruptions.
“The latest resurgence of COVID-19 in China came at a time when risks are rising for Chinese companies,” S&P Global Ratings analysts wrote.
“Higher leverage, weaker cash flows, tighter liquidity and volatile financing conditions are biting. And all of this is happening amid events of anguish and unprecedented regulatory action,” they said.
The need to manage recurring episodes of outbreaks and blockages under the COVID zero approach adds additional burdens to companies in the country, which have not yet fully recovered and are seeing credit trends weaken.
Covid cases across China increased in July and August, standing at a maximum of more than 110 cases during the 7-day average in August, according to Our World in Data. This was not seen since January, when cases were over 120. Infections had been controlled before the July rise, and dropped to seven cases during the 7-day average in March.
Although the number of infections is still low compared to other major economies, China had shown zero tolerance for any increase in cases.
In August, the country closed a key terminal at its port of Ningbo-Zhoushan, the third busiest port in the world, after a worker became infected with Covid-19. In early June, Covid infections caused disruptions in southern China’s maritime hubs, including major ports in Shenzhen and Guangzhou, the first time China suspended operations in ports due to Covid cases.
Debt distress in China’s largest companies
In response to the latest rise in cases, the Chinese government undertook a series of measures, imposing massive 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 reducing cases, it also showed that even just one specific response caused disruptions in large parts of the country.
“The need to manage recurring episodes of outbreaks and blockages under the zero-COVID approach adds additional burdens to companies in the country, which have not yet fully recovered and are seeing weakening credit trends,” the S&P report said.
China’s top bad debt manager Huarong has been struggling with failed investment and, after failing to present its gains on time earlier this year, triggered a market crash with its good falls.
S&P Global Ratings said the ratings of the companies of the future could be pushed “more negatively” if outbreaks continue to disrupt the country.
The rating firm identified larger sectors with a downside risk, in terms of having negative ratings ahead. They include motor vehicles, real estate, media and leisure, and local government financing vehicles: companies owned by local governments in China that were set up to fund public infrastructure projects.
– CNBC’s Yen Nee Lee contributed to this report.