Bangkok--26 Feb--Standard & Poor's
RATING ACTIONOn Feb. 26, 2015, Standard & Poor's Ratings Services affirmed the 'AA-'long-term and 'A-1+' short-term sovereign credit ratings on the People'sRepublic of China. The outlook on the long-term rating is stable. In line withthis, we are also affirming our 'cnAAA/cnA-1+' Greater China regional scaleratings. Our transfer and convertibility (T&C) assessment is 'AA-'.
RATIONALE
The ratings on China reflect our view of the government's reform agenda, thecountry's growth prospects, and its strong external metrics. We weigh thesestrengths against credit factors that are weaker than typically seen insimilarly rated peers. These include China's lower average income, lessertransparency, and more restricted information flows.
We believe the government is taking a number of steps to make its economy andpublic finances more resilient. Initiatives include determined efforts toreduce graft, measures to enhance the business environment for privatecompanies, and directives to delineate more clearly the fiscalresponsibilities of different levels of the public sector. Reforms toliberalize the financial sector include allowing greater flexibility in theexchange rate regime.
The design and implementation of the government's measures support our viewthat policymaking has generally been effective since China embarked on reformsin the late 1970s. We acknowledge that the central government has deliveredstrong economic growth and sustainable public finances. However, limitedinformation flow could lead to the misallocation of resources and creatediscontent over time.
Implementing the central government's reforms may help to lower China's growthrate over the next few years. But we believe the reforms will also reduce thechances of abrupt changes in GDP from one year to the next.
We also expect sluggish demand for China's exports, a soft property market,and slowing credit growth to weigh on the economy in the next year. Weestimate that annual growth in real GDP will average roughly 6% over the nextdecade from 10% in the previous decade. Such growth is still faster than thatof countries with similar income levels. GDP per capita would likely reachUS$8,100 in 2015 from US$7,500 in 2014.
China's strong external profile remains a key credit strength. We expect Chinato post a current account surplus of close to 2% of GDP over the next threeyears--partly as more Chinese exporters move up in the value chain and asimproved transportation links better connect inland provinces to foreignmarkets. China is a large external creditor. By the broadest measure, weestimate the country's external assets exceeded its external liabilities by73% of its current account receipts (CAR) at end-2014. China's externalliquidity position is equally robust: We project its gross external financingneeds in 2015 will be only 52% of CAR plus usable reserves.
We project the reserves will rise moderately over the next three years fromabout US$4 trillion in 2014. These reserves are a major part of China'snon-equity external assets. We estimate the reserves represent a third ofglobal currency reserves as of the third quarter of 2014, based on the IMF's
"Currency Composition of Official Foreign Exchange Reserves."
The increasingly global use of China's currency is also bolstering itsexternal financial resilience, in our view. According to the Bank forInternational Settlement's "Triennial Central Bank Survey," publishedSeptember 2013, the renminbi is one leg of 1.7% of global spot foreignexchange transactions. Although the People's Bank of China (the central bank)does not operate a fully floating foreign exchange regime, it has allowed muchgreater flexibility in the exchange rate. This in turn has provided a usefulbuffer to external shocks, a boost to domestic consumption, and a palliativeto protectionist sentiment from China's major trading partners.
We expect China to maintain a largely healthy fiscal profile over next two tothree years. The country's most ambitious fiscal reforms since 1994 includemuch greater fiscal transparency, better budgetary planning and execution, andrisk-based subnational debt management. Speedy implementation of these reformscould help China manage slower growth of fiscal revenue during the next two tothree years. We therefore project reported general government debt willincrease by an average of 2.6% of GDP each year over 2015-2017. Our forecastfactors in the prospective issuance of provincial governments bonds torefinance some of the debts of government-related entities (GREs).
The government's debt position remains a credit strength for the sovereignrating. We believe that China's net general government debt should risemodestly to only 19% of GDP in 2017 from 16% in 2015, and interest expenseswill likely remain below 2.5% of general government revenue. China's net
general government debt should be notably lower than 60% of GDP, even if wefactored in some of the debt (mostly bank loans) incurred by GREs that rely insubstance on fiscal funds for repayment. Excluding such GRE debt, we do notbelieve contingent fiscal liabilities from the financial or other sectors posematerial risks to public finances.
We believe that China's monetary policy is largely credible and effective, ashighlighted by low inflation. China's consumer price index (CPI) has risen onaverage 3% over 2008-2014. The CPI inflation is likely to remain at 1%-2%annually over 2015-2017. Although the central government has the final say insetting rates, the central bank has significant operational independence, inour view, especially regarding open-market operations. The impact of theseoperations on the economy transmits through a largely responsive interbankmarket and a sizable and expanding domestic bond market.
OUTLOOK
The stable outlook is based on our assessment that the central government'spolicy agenda will make China's economy more resilient to shocks, meaningless-extreme changes in GDP. This assessment includes our assumption thatChina should be able to curb credit growth and gradually shift its growthmodel away from investment towards private consumption.
We may raise the ratings if the central government's announced reforms lead tomuch greater reliance on market-based macroeconomic management tools. Supportwould likely come from better transparency, improved information availability,and deeper liberalization of the financial market.
Conversely, we may lower the ratings if material contingent fiscal riskscrystalize, perhaps due to a hard landing of the economy. Such a scenario iscontrary to our current expectation, however. We could also lower the ratingsif policymakers resort to fast credit expansion to cushion economic shocksprior to having materially better governance to prevent ineffectiveinvestments. Such a scenario would increase the risks to stability in thefinancial sector and may trigger a sharp correction of the economy.