China's rising inflation and soaring raw material costs are exerting pressure on companies, with a knock-on effect in Hong Kong and Taiwan, a leading ratings agency has said.
However, despite the situation, the overall outlook remains positive, Standard & Poor's has said.
"The credit quality of major rated companies in China, Hong Kong and Taiwan is likely to remain sound this year," said the agency.
"But as the proportion of greater China issuers rated as speculative grade continues to rise, volatility will increase," it warned, adding that companies so rated, which comprise 54 per cent of the total, would come under "particular stress" this year as credit becomes less available and more expensive.
However, S&P said that while it expects China's 2008 real GDP growth to edge down to 9.3 per cent from 11.4 per cent last year, it will remain sufficiently strong to absorb some external shocks such as rocketing oil prices.
The report warned that tighter credit growth will slow economic growth and could sink overly optimistic projections for turnover and price growth that some companies have used to justify aggressive expansion.
"Companies that funded their aggressive expansion plans with a large dose of debt will therefore see profits squeezed as revenue growth slows down and interest expenses rise," it said.
The ratings agency highlighted other threats to China's growth prospects including widening income disparity, rising unemployment and lack of affordable housing.
"All of which could bubble over into social unrest," S&P said. "The government is trying to juggle policies to sustain growth with social appeasement. That's one reason why Beijing hasn't allowed power producers to pass through fuel cost increases to customers," it added. Meanwhile, Industrial & Commercial Bank of China and Bank of China yesterday posted higher fourth-quarter profits, buoyed by the surging economy.
However, the state giants were dragged down by holdings in US subprime-related securities.
After a bumper 2007, Chinese banks are expected to face a tougher market in 2008 as Beijing imposes curbs on lending and takes other steps aimed at heading off resurgent inflation.
Bank of China, the country's flagship foreign exchange lender, said it held about £2.5 billion worth of subprime-related asset-backed securities at the end of 2007, and booked a £650 million provision to cover potential losses on its US securities.
The bank lowered its exposure to subprime-related holdings from £4.8 billion in August and £3.9 billion in September after shedding its portfolio of collateralised debt obligations.