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China’s biggest companies can weather US-China trade war escalation, says rating agency S&P

S&P Global Ratings said the biggest Chinese companies it rates should be able to withstand the escalation of a trade war between the US and China in the near term, but prolonged uncertainty and lagging market confidence could make it harder for them to refinance debt if it persists.

The rating agency said it estimates that only about 8 per cent of the companies that it assesses have direct exposure to the increased tariffs on exports to the US and most have sufficient buffers or alternative revenue options to offset the effects.

Nearly half of the companies S&P rates are state-owned enterprises and 22 per cent are in the property sector. The export sector has the highest exposure to trade tariffs, but many of those companies are foreign-owned or small private firms that S&P does not cover.

“An escalation in US trade tensions shouldn’t be an immediate hammer blow for China’s rated companies,” Cindy H Huang, an S&P credit analyst in Hong Kong, said in a report released on Wednesday.

“Rated issuers could absorb for now a 25 per cent hike in tariffs on all Chinese goods exported to the US, given their focus on domestic markets.

“But the second-order impacts such as disruptions to supply chains, market confidence, and currency volatility could become significant credit negatives if the situation is prolonged and escalates further.”

On Friday, US President Donald Trump increased tariffs on about US$200 billion of Chinese-made goods from 10 per cent to 25 per cent in a further escalation of tensions between the world’s two largest economies. The US has said it is preparing to add tariffs to the remaining US$300 billion of Chinese goods that have so far avoided higher levies and could do so in late June or July after a comment period.

China has responded with a plan to raise duties on US$60 billion of American-made products on June 1. It is a sharp change from a few weeks ago when both sides were confident they were close to an agreement on trade.

The sectors with the highest exposure to the US are consumer products, business and consumer services, technology, capital goods, and auto suppliers, S&P said.

“We expect revenues and margins to decline for companies in these sectors if 25 per cent tariffs are applied to all Chinese goods exported to the US,” S&P said. “However, for rated companies, the immediate impact should be manageable at current rating levels.”

Companies such as sourcing group Li & Fung and furniture maker Yihua Enterprise (Group) respectively derive about 30 per cent and 20 per cent of their revenue from the US market, S&P said.

Indirect costs could be significant over time, particularly if prolonged tensions disrupt the global supply chain for the technology and manufacturing sectors, S&P said.

“Trade tensions could also weaken consumer confidence, business investment plans, and market sentiment,” the rating agency said. “This in turn could create higher uncertainties for businesses, weaken profitability, and make it harder for Chinese companies to refinance debt.”
Source: South China Morning Post

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