CHINA - Media
OutReach - 10 Sept 2018 - Pengyuan International has assigned a first-time
global scale long-term foreign-currency sovereign issuer credit rating of 'AA' and
a long-term local-currency sovereign issuer credit rating of 'AA+' to the
People's Republic of China. The Outlook is Stable.
The sovereign credit rating on China reflects
our view that China's largely effective and adaptive institutions &
policies would continue facilitating the realization of the country's great
economic potentials in the next three years despite significant domestic and
external challenges. Thus, China's growth performance and external position
would remain strong during the period.
Amid social stability anchored by strong
political leadership of the Communist Party, China has been undertaking
market-oriented reforms and opening-up policies since late 1970s, placing great
emphasis on infrastructure investment and taking mostly decisive and adaptive
measures to maintain macroeconomic stability. These enable China to grow a
dynamic mixed economy with competitive exporting sectors and strong external
However, the institutions and governance lag in
some respects behind the needs of the fast-growing economy in our view, which
delays the pace of allowing market force playing a greater role in resource
allocation as the Party envisioned and constrains the society's resilience to
substantial economic slowdown. Accordingly, the government would have to walk a
fine line between supporting growth for near-term stability and strengthening
financial discipline necessary for longer-term sustainability, a task becoming
more challenging under the downward economic pressure from frayed commercial
ties between the U.S. and China.
Intermediate Stage of Economic
Development. China is at intermediate stage of
economic development in our view. The country's GDP per capita is likely to
reach US$9,400 in 2018, close to the middle point of the range US$6,000~12,000
that corresponds to Stage Three of economic development out of a five-stage
classification system under our sovereign rating criteria.
Moderate Debt Burden.
The debt burden of general government is moderate in our estimate. Net debt of
general government was about 33% of GDP at the end of 2017, with the
net-debt-to-GDP ratio rising by about 0.9 percentage point per year on average
over 2012-2021. However, the sovereign's creditworthiness is under notable
pressure from substantial contingent liabilities.
Strong Economic Fundamentals. We
expect the weighted average real GDP growth of China over 2012-2021 to be 6.7%.
China's growth performance is
markedly higher than what is normally seen for a country at its stage of
economic development. The odds are very low in our view that the two major
downside risks to the economy--a sharp decline in housing construction and
delivery and a freeze of commercial ties between the United States and China--would
materialize. Meanwhile, China's balance of payments performance is
strong for a country at intermediate stage of economic development, supported
by a weighted average current account balance of 1.4% of GDP over 2012-2021 and
strong international investment position (71% of current account payment in
Strong Institutions &
Policies. Both of China's general institutions and monetary
institutions are strong for its stage of economic development. China has
very high political and social stability. The general institutions & policies
of China has been quite effective in delivering robust economic and external
performance over a long period of time. However, the institutions and
governance lag in some respects behind the needs of the fast-growing economy. Besides,
some statistics important to effective policymaking and resource allocation are
still lacking. On the monetary side, China's modest inflation and effective
capital controls create substantial space for China to support economic growth
with accommodative monetary policy in stress scenarios, although the space of
monetary expansion is tempered to some extent by the high macro-leverage of the
economy. 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 and
pattern do not add much to or
mitigate significantly the liquidity risk of the government. The government has
low reliance on short-term debt or borrowing from non-residents; budgetary
deficit is modest; and the maturity profile of debt is fairly balanced.
Meanwhile, we expect China's basic balance of payments to remain in surplus in
the next three years, while the short-term foreign currency external debt by
remaining maturity would stay below 30% of accessible foreign exchange reserve over
the same period. This would help to reduce the external liquidity risk of the government.
Greater Capacity to Service
Local-currency Debt. China's strong monetary
institutions gives the government marked potential space of monetary expansion
in stress scenarios to support the service of local currency debt, which helps
to justify a local-currency issuer credit rating (ICR) one notch higher than
foreign-currency ICR under our sovereign rating methodology.
stable outlook reflects our estimate that China's growth potential remains
strong; the institutions & policies will continue to be quite adaptive and
effective in addressing key challenges; and U.S. as a country would seek to
trade with China on more favourable terms rather than to freeze the bilateral commercial
could raise the rating if China makes substantial progress in strengthening
institutions & policies, particularly through strengthening the governance
of government, improving the division of roles between government and market
and enhancing the availability and quality of some key statistics. This would
help China realize its great economic potential in a more sustainable way.
could lower the rating if administrative intervention in the economy become
much more extensive and intensified and such intervention may become a regular
feature of the economy for years to come, or if the government resorts to
aggressive credit expansion to prop up economic growth. In such scenarios,
performance and sustainability of Chinese economy could suffer markedly further
down the road.
ratings mentioned in this press release are unsolicited ratings.
Date of Relevant
Rating Committee: 21 August 2018
information is available on www.pyrating.com
Sovereign Rating Criteria (30 May 2018)
General Principles of Credit Ratings (21 Nov 2017)
Unsolicited ratings --
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