Monday, Mar 18, 2019
MARC has assigned a foreign currency sovereign rating of AAA to the People’s Republic of China (China) with a stable outlook based on its national rating scale. The AAA rating reflects the strength of China’s large resilient economy, robust external position and its reform agenda. Its rating strengths are, however, tempered by its highly leveraged non-financial corporate sector and the US-China trade war. The stable outlook is based on expectations of continued institutional reforms, pragmatic policy-making, Beijing’s continued ability to respond credibly to domestic economic and financial stress, and no sudden erosion of external buffers. We are, nevertheless, cautious on the outlook because of rising geopolitical and geo-economic uncertainties, given internal fault lines.
China’s economic strength, thanks to factors that include its large economy, a high national savings rate and a low level of external debt, is a rating support. Being t he world’s largest economy on a purchasing power parity basis, it continues to enjoy relatively robust gross domestic product growth. It is a major contributor to global growth and trade given its position as the world’s largest manufacturer and merchandise trader. Not surprisingly, the Chinese economy, according to World Economic Forum data, is globally competitive.
Another important rating support is China’s robust external position. Persistent current account surpluses have resulted in the accumulation of massive external buffers. As of end-December 2018, foreign exchange reserves stood at USD3.07 trillion. Meanwhile, China’s net international investment position stands at around 15% of gross domestic product. An analysis of its components shows gross foreign assets standing high with foreign exchange reserves dominating while gross liabilities are mostly foreign direct investment-related.
China’s continuing reform agenda is an important credit support. Among other things, it aims to shift the economy away from one based on government spending, state-owned enterprises and low-cost exports towards one based on private investment, entrepreneurial innovation and domestic consumption. This should set the economy on a more sustainable growth path. Continued support for reforms is expected given the promotions of personalities who have been key to driving reforms during the March 2018 National People’s Congress.
Meanwhile, risks in China’s non-financial corporate sector are tilted to the upside given high leverage. As of end-June 2018, credit to the sector stood at 155.1% of GDP, exceeding those of Singapore, South Korea and Malaysia, its rating peers in MARC’s rating universe. Credit risk concerns have risen with stronger headwinds coming from the ongoing domestic slowdown, weakening global growth and trade, and US-China trade tensions.
The US-China trade war may not have caused China's economic slowdown, though it has introduced significant challenges. As of the time of writing, the increase in tariffs on US imports from China originally scheduled to take effect on March 2, 2019 has been delayed because of “progress” in trade negotiations. According to the results of a recent survey conducted by QIMA, a leading supply chain auditor, foreign firms are already diversifying their sourcing, production and supply chains away from China given the uncertainties.
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