View Credit Analysis Report (6053638)

Date Article2021-04-07 00:00:00

MARC has affirmed the People’s Republic of China’s (“China”) foreign currency sovereign rating at AAA with a stable outlook based on its national rating scale.  The AAA rating reflects several credit strengths, including a large and well-diversified, resilient economy. Thanks to an effective stimulus package, China’s quarterly recovery was quick and it managed to avoid an economic contraction in 2020. Meanwhile, massive foreign exchange reserves continue to serve as a strong buffer against external shocks.

The recovery continues and the government expects GDP growth of above 6.0% this year. Going forward, we see the “Made in China 2025” plan driving domestic demand and growth. Fiscal sustainability, given the positive net financial worth position, is not expected to be an issue. With fiscal policy normalising, the government expects a deficit of 3.2% of GDP this year, very close to the allowed “around 3.0% of GDP” which it adopted during normal times. We see China’s evolving regulatory enforcement continuing to mitigate its elevated macro-financial risks. Debt sustainability should also benefit from improved productivity and growth rates triggered by the government’s comprehensive industry upgrading plan.

Notwithstanding the improving outlook, ensuring economic and financial stability given the high macro leverage amid rebalancing efforts as the world undergoes a divergent recovery is a key credit concern. Elevated US-China tensions will not help. There have been regulatory successes, though. For example, the size of the shadow banking system – in which financial activity takes place outside of traditional banking regulations and systems – has fallen to around 40% of GDP from over 60%.

Our stable outlook reflects the government’s capacity and track record of maintaining economic, financial and social stability given its positive net financial worth position and control over the economic, financial and political systems. It also reflects our expectation of, among other things, continued strong reform capacity, as well as pragmatic policymaking and the ability to respond credibly to economic and financial stress. We are nevertheless cautious on the rating outlook because of the risk of, among other things, a coronavirus resurgence and/or a further sudden spike in geopolitical and geo-economic uncertainties that could substantially increase economic and financial risks.

Major Rating Factors 

Resilient economy; 
Robust external position; and
Strong reform capacity.

High macro-leverage; and  
Geopolitical tensions. 

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