TEXT-S&P affirms 'AA-/A-1+' sovereign rating on China
(The following statement was released by the rating agency)
Nov 29 -
-- China's exceptional growth prospects, strong external asset position, and modest government indebtedness are key supporting factors for the government's creditworthiness.
-- These strengths offset weaknesses associated with its low middle-income economy, restricted information flows, and the government's continued reliance on direct administrative tools to manage the economy.
-- We are affirming our sovereign credit rating on China at 'AA-/A-1+'. In line with this, we are affirming our Greater China regional scale rating at 'cnAAA/cnA-1+'.
-- The outlook on the global scale foreign-currency and local-currency long-term ratings is stable.
On Nov. 29, 2012, Standard & Poor's Ratings Services affirmed the 'AA-' long-term and 'A-1+' short-term sovereign credit rating on the People's Republic of China. The outlook is stable. In line with this, we are affirming our Greater China regional scale rating at 'cnAAA/cnA-1+'. Our transfer and convertibility (T&C) assessment is 'AA-'.
The sovereign ratings on China reflect the country's strong economic growth potential, robust external position, and the government's relatively healthy fiscal position. These strengths balance weaknesses related to China's lower average income compared with similarly-rated peers, a general lack of transparency, restricted information flows, as well as an economic policy framework that is still evolving to suit its largely market-based economy.
We expect no major change in policy directions in China in the wake of the recent top leadership changes. Efforts toward deepening structural and fiscal reforms are likely to continue. We expect the Chinese economy to continue its strong growth while the country maintains its large external creditor position in the next three to five years.
We project per capita real GDP growth in 2013-2015 at 7.3%, less than the 10.2% average rate of the past five years (2007-2011). We expect China's high domestic savings to be more than sufficient to fund strong investment spending in the near future. Standard & Poor's projects that the resulting current account surpluses will keep the country's narrow net external creditor position at close to the amount of its current account receipts throughout 2011-2014.
In this base-case scenario, we project general government debt to increase by an average amount equal to 1.4% of GDP each year over 2012-2015. General government debt should continue to fall as a share of GDP, with the net general government debt declining to close to 13.4% of GDP by 2014. However, we believe China's fiscal position to be somewhat weaker than these indicators suggest. Local governments in the country owe significant off-budget debt. Much of these debts belong to enterprises that these lower-level governments own. The lack of timely and regularly available data, as well as questions regarding the legal responsibilities of local governments for these debts, makes external monitoring of such debts extremely difficult.
More generally, the restricted flow of information and lack of transparency in China lessens support for the government's credit standing. External analysts are less likely to be able to detect early any developments that affect the ability of sovereigns to service debt. This makes future trends in key factors affecting sovereign creditworthiness more unpredictable. It is also difficult to judge the appropriateness of direct government interventions in the economy that policymakers rely on for managing the economy. The lack of transparency could also increase the risks of policy mistakes as the Chinese economy increases in complexity.
China's average income remains lower than similarly-rated sovereigns. We consider this another key credit weakness that may exacerbate the impact of errors in economic policies. Standard & Poor's estimates the Chinese per capita GDP in 2012 at US$6,141. This measure signals significant inefficiency in the Chinese economy, making it less resilient to a major shock than a high-income economy. Large adverse economic or financial developments, including those related to policy errors, could cause more significant and prolonged damage to growth prospects than in a more efficient economy.
We equalize the T&C assessment for China with the sovereign foreign currency rating. This reflects Standard & Poor's opinion that the likelihood of the sovereign restricting access to foreign exchange needed by China-based non-sovereign issuers for debt servicing is similar to the likelihood of the sovereign defaulting on its foreign currency obligations. The interventionist nature of government policies and the existing foreign exchange restrictions underlie this opinion.
The stable rating outlook reflects Standard & Poor's view that China can absorb potential balance sheet losses with little damage to its credit standing, given its substantial foreign exchange reserves and strong fiscal position. We may raise the rating if structural reforms lead to a more vibrant domestic debt capital market, a greater reliance on market-based macroeconomic management tools, and a more flexible exchange rate. Conversely, we may lower the rating if reform efforts weaken, in combination with a markedly lower economic performance and worse banking sector credit metrics than what we currently expect.
Related Criteria And Research
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
China (People's Republic of )
Sovereign Credit Rating AA-/Stable/A-1+
Greater China Regional Scale cnAAA/cnA-1+
Transfer & Convertibility Assessment AA-
Senior Unsecured cnAAA
Senior Unsecured AA-