HONG KONG,CHINA - MediaOutReach - 10 Sept 2018 - Pengyuan International has assigned a first-timeglobal scale long-term foreign-currency sovereign issuer credit rating of 'AA' anda long-term local-currency sovereign issuer credit rating of 'AA+' to thePeople's Republic of China. The Outlook is Stable.
The sovereign credit rating on China reflectsour view that China's largely effective and adaptive institutions &policies would continue facilitating the realization of the country's greateconomic potentials in the next three years despite significant domestic andexternal challenges. Thus, China's growth performance and external positionwould remain strong during the period.
Amid social stability anchored by strongpolitical leadership of the Communist Party, China has been undertakingmarket-oriented reforms and opening-up policies since late 1970s, placing greatemphasis on infrastructure investment and taking mostly decisive and adaptivemeasures to maintain macroeconomic stability. These enable China to grow adynamic mixed economy with competitive exporting sectors and strong externalpositions.
However, the institutions and governance lag insome respects behind the needs of the fast-growing economy in our view, whichdelays the pace of allowing market force playing a greater role in resourceallocation as the Party envisioned and constrains the society's resilience tosubstantial economic slowdown. Accordingly, the government would have to walk afine line between supporting growth for near-term stability and strengtheningfinancial discipline necessary for longer-term sustainability, a task becomingmore challenging under the downward economic pressure from frayed commercialties between the U.S. and China.
Intermediate Stage of EconomicDevelopment. China is at intermediate stage ofeconomic development in our view. The country's GDP per capita is likely toreach US$9,400 in 2018, close to the middle point of the range US$6,000~12,000that corresponds to Stage Three of economic development out of a five-stageclassification system under our sovereign rating criteria.
Moderate Debt Burden.The debt burden of general government is moderate in our estimate. Net debt ofgeneral government was about 33% of GDP at the end of 2017, with thenet-debt-to-GDP ratio rising by about 0.9 percentage point per year on averageover 2012-2021. However, the sovereign's creditworthiness is under notablepressure from substantial contingent liabilities.
Strong Economic Fundamentals. Weexpect the weighted average real GDP growth of China over 2012-2021 to be 6.7%.China's growth performance ismarkedly higher than what is normally seen for a country at its stage ofeconomic development. The odds are very low in our view that the two majordownside risks to the economy--a sharp decline in housing construction anddelivery and a freeze of commercial ties between the United States and China--wouldmaterialize. Meanwhile, China's balance of payments performance isstrong for a country at intermediate stage of economic development, supportedby a weighted average current account balance of 1.4% of GDP over 2012-2021 andstrong international investment position (71% of current account payment in2017).
Strong Institutions &Policies. Both of China's general institutions and monetaryinstitutions are strong for its stage of economic development. China hasvery high political and social stability. The general institutions & policiesof China has been quite effective in delivering robust economic and externalperformance over a long period of time. However, the institutions andgovernance lag in some respects behind the needs of the fast-growing economy. Besides,some statistics important to effective policymaking and resource allocation arestill lacking. On the monetary side, China's modest inflation and effectivecapital controls create substantial space for China to support economic growthwith accommodative monetary policy in stress scenarios, although the space ofmonetary expansion is tempered to some extent by the high macro-leverage of theeconomy. Average CPI inflation is likely to reach 2.3% over 2012-2021 in our estimate,with a standard deviation of 0.5 percentage point.
Low Government Liquidity Risk.The government's borrowing needs andpattern do not add much to ormitigate significantly the liquidity risk of the government. The government haslow reliance on short-term debt or borrowing from non-residents; budgetarydeficit is modest; and the maturity profile of debt is fairly balanced.Meanwhile, we expect China's basic balance of payments to remain in surplus inthe next three years, while the short-term foreign currency external debt byremaining maturity would stay below 30% of accessible foreign exchange reserve overthe same period. This would help to reduce the external liquidity risk of the government.
Greater Capacity to ServiceLocal-currency Debt. China's strong monetaryinstitutions gives the government marked potential space of monetary expansionin stress scenarios to support the service of local currency debt, which helpsto justify a local-currency issuer credit rating (ICR) one notch higher thanforeign-currency ICR under our sovereign rating methodology.
Thestable outlook reflects our estimate that China's growth potential remainsstrong; the institutions & policies will continue to be quite adaptive andeffective in addressing key challenges; and U.S. as a country would seek totrade with China on more favourable terms rather than to freeze the bilateral commercialties.
Wecould raise the rating if China makes substantial progress in strengtheninginstitutions & policies, particularly through strengthening the governanceof government, improving the division of roles between government and marketand enhancing the availability and quality of some key statistics. This wouldhelp China realize its great economic potential in a more sustainable way.
Wecould lower the rating if administrative intervention in the economy becomemuch more extensive and intensified and such intervention may become a regularfeature of the economy for years to come, or if the government resorts toaggressive credit expansion to prop up economic growth. In such scenarios,performance and sustainability of Chinese economy could suffer markedly furtherdown the road.
Note:ratings mentioned in this press release are unsolicited ratings.
Date of RelevantRating Committee: 21 August 2018
Additionalinformation is available on www.pyrating.com
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