The declining profitability of China's corporate sector over several years contributed to the recent nearly 9 percent dive in China, according to a report that Standard & Poor's (S&P) Ratings Services published yesterday titled "Shanghai's Share Market Correction Isn't Surprising Given the Declining Profitability of China's Corporates."
S&P emphasized in its report that the impact of the market correction on corporates is pretty much dependent on their reaction to it and the central government's efforts to shore up the market and economy.
"We forewarned three years ago that the average profitability of the largest Chinese corporates was declining. Indeed, the financial risks of listed companies worsened over the [past] five years to 2014 before steadying recently," said S&P's credit analyst Terry Chan. "A slowdown in investment activity could bring about the reduced prospects the corporates fear, given the country's still high dependence on investments to drive economic growth. This self-reinforcing spiral would negatively affect corporate credit profiles."
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