China’s financial reforms, more conservative growth objectives and greater tolerance of defaults have made China’s growth model more sustainable, particularly in its capacity to absorb the lingering debt overhang from the global financial crisis.
Scope Ratings highlights as credit positive the Chinese state’s commitment to reining in credit growth, deflating asset bubbles and cutting off state support for unproductive firms while also encouraging the development of China’s financial markets and the opening of the capital account.
Reduced financial-stability risk is partially a function of the government’s reduced concentration on meeting inflated ‘hard’ growth objectives. The latest Five-Year Plan target of doubling the size of the economy between 2020 and 2035 implies more manageable average annual growth of 4.5% over 2022-35 assuming growth in GDP of 9.3% (Scope’s forecast) this year.
“Such reforms ease still significant economy-wide debt risks and increase likelihood of a ‘soft’ rather than ‘hard’ landing after the significant private- and public-sector debt accumulated since the global financial crisis,” says Dennis Shen, analyst at Scope.
“At the same time, the growth trend of China’s large and diversified economy remains very high compared with that of similarly rated sovereigns even if it moderates towards a 5% rate in the medium run,” says Shen.
Scope affirmed China’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at A+ on 9 July and revised the Outlooks to Stable from Negative. Scope has also affirmed China’s short-term issuer ratings at S-1+ in local- and foreign-currency and revised the Outlooks to Stable from Negative.
“Extensive supervisory and regulatory changes have intensified since the Covid-19 economic crisis with the People’s Bank of China laying out defined priorities in the period to 2025 that include improvement of the macro-prudential assessment framework and strengthening supervision of systemically important institutions, businesses and infrastructure,” says Shen.
Further anchoring China’s sovereign credit outlook is gradual progress in establishing the renminbi as a global reserve currency, which in turn reinforces the country’s economic resilience beyond existing external-sector buffers relating to high foreign-exchange reserves and low external debt.
“Structural public-sector fiscal deficits as well as an increasing public-sector debt stock over the long run remain prevailing credit challenges, exacerbated by the fiscal and monetary easing adopted to cushion China’s economy against repeated macroeconomic shocks,” says Shen.
China’s general government deficit increased to 11.4% of GDP in 2020 despite relatively moderate pandemic-related fiscal stimulus, from 6.3% in 2019 and only 0.9% of GDP in 2014. The general government deficit will remain a sizeable 9.5% of GDP this year before narrowing to 8.6% next year.
“High and rising levels of total non-financial sector debt since 2008 remain a core credit challenge, although authorities have taken critical steps to easing this trajectory of rising debt,” says Shen.
Contributing writer: Matthew Curtin
