TEXT-Fitch: Corporate Winners and Losers in a Rebalanced China Scenario

Wed Jan 23, 2013 8:35pm EST

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(The following was released by the rating agency)

Link to Fitch Ratings' Report: Scenario: China Rebalanced; What a Rebalanced China Would Mean for Corporates

here

SINGAPORE/HONG KONG/LONDON, January 23 (Fitch) As China transitions from an investment-led to a sustainable consumer-led economy, new industries will expand in size to meet empowered consumers' requirements, Fitch Ratings says in its new "China Rebalanced" scenario report today. Existing industries will also need to move up the value-added and innovation chain in order to ensure sustainable growth into the future.

Fitch believes that if improved welfare state apparatus is in place in a rebalanced China, which reduces consumers' needs to save, new service-orientated industries will expand rapidly. These include travel, leisure and foodstuff companies, healthcare (products, hospitals and services) and particularly elderly care, given projected demographic changes.

Other industries have various challenges. China's domestic technology sector would migrate from its low-cost assembling role, and seek to move up the value-added innovation curve as its workforce became more expensive and China's empowered consumers increase their domestic spending power. In turn, if successful, these sizeable Chinese technology groups could then pose serious threats to Japanese and potentially Korean technology groups, just as Korean entities are currently challenging Japan's position.

However, Fitch questions if a lack of institutional reform in the guise of intellectual property rights protection, rule of law and enforcement would hinder Chinese companies' (including those in the tech industry) movement up the innovation curve.

Similarly, domestic participants in the steel and chemical industries would also need to move up the value-added chain. The Chinese steel industry's product palette and overcapacity are largely driven by the existing investment-led economic model, with profitability a secondary consideration. Therefore, the challenges to move up the value chain are greater. However the chemicals sector illustrates an industrial sector where this process is already progressing.

China has moved off the bottom of the value chain in chemicals, transitioning away from commodity to specialty chemicals. Domestic joint ventures which have embraced overseas technology have established themselves at the better end of the domestic cost curve for chemicals, but China has a disadvantage in having coal plant crackers (rather than cheaper gas).

For a detailed discussion on commodities, autos, housing and the energy and utility industries, see Fitch's report "China Rebalanced: What a Rebalanced China would mean for Corporates," available at www.fitchratings.com.

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