Default-risk jumps to 2005 high, says Moody’s Analytics

Default risk for Chinese companies has climbed to the highest in 13 years as Beijing seeks to rein in its post-crisis construction boom, according to Moody’s Analytics.

The research group’s measure of expected default frequency has risen above early-warning levels for about 25 percent of corporate borrowers. Moody’s Analytics, a separate entity from the ratings agency, uses the gauge to isolate companies and sectors that merit further investigation for financial distress.

“This share has been rising steadily for the past two years and now sits near the highs last seen in 2005,” Glenn Levine, a senior research analyst, wrote in a report this month.

China has already seen a record pace of bond defaults this year, a consequence in part of policy makers’ efforts to reduce leverage in the financial system.

While the economy remains in relatively firm shape, the country is now at a pivotal juncture, Levine added. “If the Chinese economy were to slow further or, worse still, if the economy were to enter a sustained downturn, we would likely see corporate credit risk start to increase sharply,” he said.

Among the 61 industry groups surveyed by Moody’s Analytics, credit risk is highest for construction, building materials and water and sewage companies in the utilities sector, the report showed.

“All of these industries are construction-related and the rise in credit risk mirrors the fall in construction activity over the past several years,” the report said.

Credit risk was lowest in pharmaceutical, computer software and food and beverage industries, the analysis showed. Gregor Stuart Hunter, Bloomberg