PEOPLE’S REPUBLIC OF CHINA - 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 the government’s reform agenda. Its rating strengths are, however, tempered by its highly leveraged non-financial corporate sector and the trade war with the US. The stable outlook is based on expectations of continued institutional reforms, pragmatic policy-making, Beijing’s continued ability to respond credibly to any instance of financial stress, and no sudden erosion of its considerable external buffers. We are, nevertheless, cautious on the outlook because of rising geopolitical and geo-economic uncertainties, especially given China’s internal fault lines.

China’s economic strength, thanks to factors that include a large economy, a high national savings rate and a low level of external debt, is a rating support. Being the world’s largest economy on a purchasing power parity basis, it continues to enjoy robust gross domestic product (GDP) growth (2018: 6.6%). A major contributor to global growth and trade, it is the world’s largest manufacturer and merchandise trader. Not surprisingly, the Chinese economy, according to World Economic Forum data, is globally competitive. Meanwhile, Beijing’s credibility in assuring markets of its ability to stabilise any disruption is an important factor supporting economic resilience.

Another important rating support is China’s robust external position. Thanks to persistent current account surpluses, it has accumulated massive external buffers. As of end-December 2018, foreign exchange reserves stood at USD3.07 trillion. Meanwhile, China’s net international investment position (NIIP) stands at around 15% of GDP. The decline from the 2007 peak of 33% had been partly driven by a sustained high pace of growth. Despite the decline, its NIIP is not expected to be a source of risk given that gross foreign assets remain high with foreign exchange reserves dominating and gross liabilities being mostly foreign direct investment-related.

China’s continuing reform agenda remains an important credit support. Its economic reform plan, which among other things aims to shift the economy away from one based on government spending, state-owned enterprises (SOE) and low-cost exports towards one based on private investment, entrepreneurial innovation and domestic consumption should set it on a sustainable path. The promotion of personalities who have been key to driving reforms during the March 2018 National People’s Congress is credit positive. For example, the elevation of Liu He – the driver of supply-side policies that cut overcapacity in steel, coal and excess housing stock – to the position of vice premier indicates continued support for such reform efforts.

Meanwhile, risks in China’s non-financial corporate sector are tilted to the upside given its high leverage. As of end-June 2018, credit to the sector stood at 155.1% of GDP, exceeding those of Singapore (113.1%), South Korea (100.0%) and Malaysia (68.9%), its rating peers in MARC’s rating universe. With stronger headwinds coming from the ongoing domestic slowdown, trade tensions and weakening global trade, credit risk concerns have risen. In 2Q2018, non-performing loans had risen RMB183.0 billion (USD27.7 billion) to RMB1.96 trillion (USD296.4 billion), the biggest quarterly jump in data going back more than a decade.

The US-China trade war may not have caused China's economic slowdown, though it has introduced significant uncertainties. 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. At the time of writing, US President Trump had announced the delay of an increase in tariffs on imports from China originally scheduled to take effect on March 2, 2019 because of “progress” in trade negotiations.

Major Rating Factors

Strengths

• Strong resilient economy;
• Robust external position; and
• Reform agenda.

Challenges/Risks

• Highly leveraged non-financial corporate sector; and
• Trade war with the United States.