MARC has affirmed its public information foreign currency sovereign rating of AAA/stable on the People’s Republic of China, based on its national rating scale. The AAA rating reflects several of China’s credit strengths, including a relatively resilient economy, which is large and well-diversified. China also has ample foreign exchange reserves — the world’s largest — to buffer against external shocks. A policy regime of tight controls over its capital account also helps reduce the risk of financial instability stemming from hot money flows. In addition, the Chinese government has a strong reform agenda aimed at, among other things, improving competitiveness and growth sustainability.
Key credit challenges include keeping growth sustainable as well as ensuring economic and financial stability amid ongoing economic rebalancing efforts and the trade war. Risks have spiked because of the coronavirus disease (COVID-19) pandemic. However, there have been regulatory successes. Shadow banking activity, for example, continued to decline in 2019 on the back of a crackdown on the sector. The crackdown has helped reduce the interconnectedness between banks and non-bank financial institutions, thus lowering potential systemic risk, which is a credit positive development. This, however, has led to a credit crunch for some industries in the private sector, resulting in increased financial tensions.
The stable rating outlook reflects our view of the government’s capacity to maintain economic, financial and social stability in the near term 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, the government’s continued pragmatic policymaking, institutional reforms and ability to respond credibly to economic and financial stresses. We are nevertheless cautious on the outlook because of elevated geopolitical and geo-economic uncertainties, especially related to elevated trade protectionism. More importantly, the COVID-19 pandemic has raised economic and financial tensions within as well as outside of China. While we expect the economic impact of the global pandemic to be significant, the degree of the impact will depend on, among other things, how the situation plays out. We will continue monitoring the situation.
Evidence of the effectiveness of fiscal and monetary policy easings to maintain economic and financial stability will be positive for China’s credit profile. Conversely, negative rating pressure could develop if further fiscal and monetary easings prove ineffective, if the policy easings cause a substantial rise in attendant risks, or if the COVID-19 pandemic worsens significantly.