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 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 massive 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 has fallen to around 40% of GDP from over 60%.