China’s economic slowdown to impact Asia Pacific, says Moody’s

Workers sort parts at an electronics company in Tengzhou, in China's eastern Shandong province on February 1, 2016. Manufacturing activity in China contracted at its fastest level in more than three years in January, government data showed on February 1, underlining weakness in the world's second-largest economy. CHINA OUT AFP PHOTO

KUALA LUMPUR: China's economic slowdown will have a spillover effect on Asia Pacific economies and negatively affect the performance of the assets backing securitisation deals in those markets, says Moody's Investors Service.

The international ratings agency, which accorded China with an Aa3, negative, said on Monday the impact would vary by country, “but will be generally limited”.

The restructuring of China's state-owned enterprises and the slower economic growth could lead to a rise in unemployment. However, because the restructuring will likely proceed slowly and cautiously, large scale unemployment will not likely occur in the short term. 

“Moody's expects China's GDP growth to register 6.3% in 2016 and 6.1% in 2017, after reaching 6.9% in 2015,” it said in its just-released report titled "Securitisation — Asia Pacific: Negative impact from China slowdown on Asia securitisation will vary by country, but will be generally limited". 

The report was co-authored by Marie Lam, a Moody's associate managing director and Georgina Lee, a Moody's assistant vice president and research writer.

"We expect a slight increase in delinquency rates for the underlying loans in Chinese auto ABS transactions, given the slowdown in China's GDP growth," Lam said. "Nevertheless, overall, delinquencies will remain low because of the good loan attributes."

"In Australia, China's slowdown will show a moderately negative impact on the performance of ABS, and to a lesser extent, RMBS," Lam added.

Moody's report pointed out that China's slowdown has weighed on the Australian commodities sector, because China is Australia's biggest export market for iron ore, and also an important market for Australia's coal exports. 

The end of the mining investment cycle has caused unemployment to increase in resource states such as Western Australia and to a lesser extent, Queensland.

This situation is in contrast to the states of New South Wales and Victoria, where the employment market has benefited from a weaker Australian dollar, caused by the decline in commodity prices.

Transactions with collateral concentrated in the resource states will be more negatively impacted than those in New South Wales and Victoria.

As for Japan, Moody's expected the impact of China's slower growth would be very minimal because of Japan's small 3% export exposure to the Chinese economy. The strong labor market in Japan also supports the performance of assets backing ABS and RMBS.

"On the Indian securitisation market, China's lower GDP growth rate will demonstrate negligible impact," said Lee. "In fact, we expect the Indian economy to grow at around 7.5% in 2016, supporting the performance of assets backing auto ABS deals," adds Lee.

Moody's explained that most of the auto loans backing Indian auto ABS comprised commercial vehicle loans. Commercial vehicle operators stand to benefit as economic growth accelerates. 

Consequently, compared with recent years when economic growth was slower, and interest rates, inflation and fuel prices were higher, commercial vehicle operators will find it easier to service their loans in 2016.