China rating A+, growth momentum remains strong

Fitch has affirmed China’s Long-Term Foreign and Local-Currency Issuer Default Ratings at A+ with a Stable Outlook. Growth momentum remains strong.

china rating A+Fitch Ratings has affirmed China’s Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) at ‘A+’ with a Stable Outlook. The Short-Term Foreign- and Local-Currency IDRs have been affirmed at ‘F1+’. The issue ratings on China’s senior unsecured bonds are also affirmed at ‘A+’ and ‘F1+’. The Country Ceiling is affirmed at ‘A+’.

China’s ratings are supported by the strength of its external finances and macroeconomic track record. The country’s near-term growth prospects remain favourable, and economic policies have been effective in responding to a variety of domestic and external pressures over the past year. In Fitch’s view, a further increase in the economy’s overall leverage in the context of continued adherence to ambitious GDP growth targets raises the potential for economic and financial shocks and will constrain growth prospects over the medium-term.

Large and rising debt levels across China’s non-financial sector, combined with the low stand-alone credit quality of Fitch-rated banks in its financial system (as indicated by their average viability rating of ‘bb’) remain the most significant risk factor for the sovereign rating. The agency expects official aggregate financing (excluding equity) will rise to 208% of GDP in 2017, from 201% in 2016 and 114% in 2008.

External finances are robust in absolute terms and relative to peers, and are expected to remain so over our rating horizon. Capital outflows have fallen sharply since early 2017 due to improved market sentiment, stabilising currency expectations, and various measures to more effectively enforce existing capital controls and scrutinise outward direct investment.

Growth momentum remains strong, due to the effectiveness of prior stimulus measures, resilient consumer trends, and a more favourable external environment that has nudged up net exports’ contribution to overall growth. Real GDP grew by 6.9% in 1Q17, up from 6.7% in 2016, and is well on track to meet the authorities’ 2017 target of “around 6.5%”.

Public finances remain a neutral rating factor. Fitch forecasts general government gross debt (GGGD) of 48.3% at end-2017, up marginally from a year prior, but broadly in line with the ‘A’ category median of 49.5%. The agency’s GGGD figures are roughly 11.5% of GDP, higher than official estimates due to the inclusion of contingent liabilities.

Fitch’s base-case scenario continues to assume a slowdown in China’s medium-term growth trajectory, consistent with declining potential growth. Moreover, rising financial fragilities associated with the continued rise in system-wide leverage increase the risk of a sharper and more disruptive slowdown.

China’s levels of income and development remain low compared with peers, even after nearly 40 years of rapid growth since market-oriented reforms began in 1978. Average income is around USD8,387 at market rates, or USD13,130 at purchasing-power parity, well below the ‘A’ medians of USD19,259 and USD27,714 respectively.