MARC Ratings 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 rating reflects several credit strengths, including a large, well-diversified, and resilient economy. Unlike many other countries, China had avoided an economic contraction during the first year of COVID-19 in 2020, thanks to an effective albeit restrained stimulus package.

The Chinese economy is one of the most competitive in the world. In the 2021 IMD World Competitiveness Rankings list, it was ranked number 16. Given this, its external position remains robust as it has continued to churn out current account surpluses. Consequently, it has accumulated massive foreign exchange reserves that serve as a strong buffer against external shocks.

Going forward, economic stabilisation and risk prevention will remain key concerns of the authorities. We see it becoming increasingly challenging for policymakers ─ especially if China continues with its strict zero-COVID policy ─ to achieve objectives such as preserving a sustainable recovery, deleveraging and de-risking while maintaining financial stability, and restructuring the economy. With growth moderating, trade-offs will inevitably become more difficult. For example, structural deleveraging efforts, which are expected to bring long-term benefits in terms of, among other things, financial stability, will likely wane to preserve stability over the short term. Higher commodity prices, inflation, rising international economic uncertainty, and geopolitical tensions have also exacerbated the situation.

Our stable outlook reflects the government’s capacity and track record of maintaining economic, financial, and social stability given its positive net financial worth position and control over the country’s economic, financial, and political system. It also reflects our expectation of, among other things, continued strong reform capacity, as well as pragmatic policymaking and the ability to respond credibly to economic and financial stress.

Further evidence of increasing likelihood of success of policy efforts to navigate a soft landing will be positive for China’s credit profile. So too will evidence that long-term financial stability will not be compromised by waning deleveraging campaign momentum to preserve short-term stability. Conversely, pressures stemming from a faster-than-expected rise in pandemic-driven leverage, or an unexpected surge of multidimensional geopolitical tensions with adverse supply-side woes will be credit negative.