Published on 26 February 2015
RAM Ratings has assigned respective
gAA3(pi)/stable and seaAAA(pi)/stable global- and ASEAN-scale sovereign
ratings to China. The ratings are premised on China’s strong economic
fundamentals and growth momentum, commitment to market reforms and
superior external strength. These positives are, however, moderated by
the country’s highly leveraged economy, substantial sovereign contingent
liabilities, and risks of a disorderly correction of the property
sector and its implications on economic growth, employment and financial
stability.
“While China’s investment-led growth model had
sustained strong GDP expansion for an extended period in the past, it
also created economic imbalances that pose risks to long-term growth
sustainability, which necessitated an economic rebalancing agenda to
realign the economy towards a more-balanced, consumption-led growth
path,” notes Esther Lai, RAM’s Head of Sovereign Ratings.
China’s external strength is underlined by its net
external creditor position, its accumulation of the world’s largest
foreign-reserve holdings (USD3.8 trillion or 40.6% of GDP in 2013) and a
light external debt load. While China’s augmented fiscal deficit of
10.1% of GDP as at end-2013 – taking into account the fiscal position of
local government off-balance sheet financing – was much higher than
that of its peers, its augmented debt load stood at a manageable 53.7%
of GDP, still allowing space to fund the nation’s fiscal deficit.
Nonetheless, the Chinese government is exposed to substantial contingent
risks, mainly stemming from the liabilities of government-linked
entities (GLEs) which amounted to 101% of GDP. The crystallisation of
these liabilities could either directly impact the government’s balance
sheet, or indirectly through state-owned banks, which have a sizeable
lending exposure to GLEs.
China’s ratings will be moved upwards if economic
rebalancing yields an overall improvement in structural weaknesses that
enhances growth sustainability and credit risk mitigation, which in turn
reduces the government’s exposure to contingent risks. Meanwhile,
fiscal reforms to address near- to medium-term vulnerabilities in
government finances, particularly in the local government budgetary
process and indebtedness, will also be deemed credit positive. On the
other hand, the ratings will face downward pressure in the event of
adverse shocks triggered by economic rebalancing which results in severe
credit deterioration and a build-up of contagion risk in the financial
system. The crystallisation of contingent liabilities that significantly
weakens government finances will also be viewed as credit negative.
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