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 Chinese financial markets and opening the capital account support the sustainability of China’s growth model.
Reduced financial-stability risk is partially a function of a noticeably reduced concentration of the state on meeting inflated ‘hard’ growth objectives. The latest Five-Year Plan target of doubling the size of the economy between 2020 and 2035 implies a more manageable average annual growth of 4.5% over 2022-35 assuming growth in GDP of 8.6% (our updated forecast) this year.
Such structural 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. As economic growth recovered slightly to 1.3% Q/Q in the second quarter, we expect Chinese authorities to balance management of financial stability risk with a parallel need to support recovery over the second half of this year.
Trend growth of China’s economy still compares favorably with that of most economies
Even as growth cooled since the initial rebound from Q1 2020 troughs, trend growth of China’s large and diversified economy remains very high compared with that of most economies around the world even if the former moderates towards a 5% rate over the medium run.
The Agency I represent 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. We 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 financial-stability reform and progress of renminbi as reserve currency underscore improved outlook
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.
Further anchoring China’s improved outlook is gradual progress in establishing the renminbi as a global reserve currency, which in turn reinforces the country’s economic resilience on top of existing external-sector buffers relating to high foreign-exchange reserves and low external debt.
Budget deficits and rising public debt remain credit challenges
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.
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 important steps to easing this trajectory of rising debt.
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Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.