State support mitigates issuers’ climate risk exposure in China

Whilst the potential for an increase in occurrence of natural disasters remains high in China, government support should mitigate the negative credit impact on issuers’ profiles, according to Fitch Ratings.

A record heatwave in China this summer affected hydropower generation and the agricultural sector, particularly in the Yangtze River region. This impaired the capacity of utilities to generate electricity, disrupting manufacturing activity. Research from the World Bank projects increase in warming leading to greater probability of hazards such as droughts, floods and heatwaves.

The insurance sector is one of the most exposed to the rising frequency of extreme events, and Fitch anticipates that claims will cover an increasing portion of economic losses from natural disasters. According to Swiss Re, insured catastrophe losses totalled around 10% of economic losses from natural disasters in China – a much higher proportion than in developed western markets.

The likelihood of Chinese issuers facing a greater credit impact from extreme events could rise if economic growth decelerates over a prolonged period, the ratings agency stated, raising fiscal pressure across local governments and limiting their capacity to focus on spending categories that seem less imperative in the short run, such as investment in climate resilience.

The government has provided aid on multiple fronts, including preemptive measures, post-disaster recovery and emergency policy response during the natural disasters in recent years.

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