China’s slowing economy is likely to pressure corporate debt payments

Fears about China’s rising debt burden pushed authorities early last year to slam the brakes on new loans and crack down on non-traditional forms of lending that are broadly known as shadow banking.

But the weakening economy, exacerbated by the ongoing trade war with the United States, has forced Chinese leaders to launch stimulus measures, which include encouraging banks to lend more and cutting taxes.

Moody’s Investors Service said in a report Thursday that a statement last week from the China Banking and Insurance Regulatory Commission that it would keep supporting private companies by increasing the credit supply is positive for “those enterprises that are fundamentally sound.”

But the impact would likely be limited for weaker companies, Moody’s said, “because increased credit in the market will mainly flow to issuers with strong credit profiles.”

Moody’s has also cited China’s economic weakness and the trade war as likely to make it harder for companies to pay their debts.

“We expect the debt-servicing capacity of borrowers in cyclical sectors to remain vulnerable to a slowing economy, in particular exposed to potential spikes in trade frictions with the U.S.,” it said in a report earlier this month.

Jackson Wong, associate director at Huarong International Securities in Hong Kong, said his firm is optimistic about progress in the trade war, but warned that the tariff battle could put Chinese companies in a bind if it ends up intensifying profitability problems.

“If the trade talks or the trade conflicts get worse, I think definitely we will see (that) the corporate debt problem gets worse,” Wong told CNBC on Friday.