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April 4 (The following statement was released by the rating agency)
Fitch Ratings has affirmed China's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A+'. The issue ratings on China's senior unsecured foreign and local currency bonds are also affirmed at 'A+'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'A+' and the Short-Term Foreign Currency IDR at 'F1'.
KEY RATING DRIVERS
The affirmation of China's IDRs reflects the following key rating drivers:
- The sovereign external balance sheet is China's core sovereign credit strength. China's foreign reserves rose to USD3,821bn at end-2013. This was equal to 19.2 months of current external payments, the third-highest ratio of any Fitch-rated sovereign globally. China's official reserves dwarf public external debt of USD34bn. Sovereign net foreign assets were worth 44.1% of GDP at end-2013, the second-highest ratio among sovereigns rated in the 'A' range (those rated 'A-', 'A' and 'A+').
- China's growth model faces tightening constraints from the rapidly increasing burden of leverage in the economy and from the deteriorating ability of the economy to absorb additional investment profitably. Continued growth of investment faster than overall GDP could see further erosion of China's current account surplus as the capacity of domestic savings to finance investment becomes more constrained. Rebalancing has yet to begin in earnest. The contribution of investment to overall GDP growth at 4.2pp outpaced consumption's contribution of 3.9pp in 2013. The structural economic challenge of rebalancing away from investment-led and credit-fuelled growth weighs on the credit profile.
- However, the state-led nature of China's economy endows the authorities with powerful levers for short-term demand management, which supports confidence in prospects for a smooth adjustment. GDP growth decelerated to 7.7% in 2012 and 2013, below China's five-year average of 8.9%, although comfortably above the global emerging-market median for 2013 of 4%. Available data indicate the labour market has remained robust to this slowdown. China's GDP growth would remain less volatile out to 2015 than the 'A' range median in Fitch's projections. However, the rebalancing process entails some risk of sharply higher volatility if things go less smoothly than Fitch expects.
- China's leadership has set out an ambitious reform agenda in a series of key policy meetings starting with the Third Plenum in November 2013. The Third Plenum established a central leadership team on reform headed by President Xi Jinping. Tangible progress remains limited, although the shift in policy direction is relatively recent. Evidence of strong political commitment to reform supports the ratings.
- Fitch estimates the level of aggregate financing in China's economy at 217% of GDP at end-2013, up from 198% at end-2012 and 128% at end-2008. The Chinese authorities have acted more aggressively to contain risks to financial stability since mid-2013. These steps included allowing greater volatility in domestic market interest rates and, more recently, in the Chinese yuan's exchange rate to discourage "one-way bets", and allowing some explicit defaults in the wholesale capital markets. The People's Bank of China has indicated a two-year timeframe for full deposit rate liberalisation. In Fitch view, this could be a powerful engine for economic rebalancing by supporting household incomes and encouraging more rational lending and investment.
- Fitch estimates general government debt rose to 53% of GDP at end-2013, not far off the 'A' range median of 52%. This includes about 12% of GDP classified as contingent liabilities by the National Audit Office. The state-dominated nature of China's economy means "true" contingent liabilities may be considerably higher. Fitch expects the resolution of China's debt problem will ultimately see debt migration onto the sovereign balance sheet in one form or another. However, greater official willingness to tolerate defaults may eventually contain the sovereign's exposure.
- Fundamental credit weaknesses, including low average incomes and weak scores for governance, weigh on the credit profile relative to 'A' range peers. Lack of transparency over the finances of local governments impedes analysis of the sovereign's overall finances and is a weakness relative to 'A' peers.
The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are balanced. The main factors that individually or collectively could lead to rating action are as follows:
- The country's ability to navigate structural economic adjustment without economic, financial or social disruption is centrally important for the sovereign credit profile and ratings. Progress on reform and rebalancing without disruptive shocks would reduce China's structural vulnerabilities.
- Greater confidence over the scale of the debt problem in China's broader economy, and of the approach to resolving it.
- Continuation of "more of the same" credit-fuelled and investment-led growth, reflecting an absence of material progress on reform and rebalancing, would exacerbate China's structural vulnerabilities. The ultimate resolution would likely be riskier and potentially costlier for the sovereign.
- A further significant and sustained rise in public indebtedness, potentially reflecting a crystallisation of contingent liabilities, without a clear prospect of a subsequent sustained decline.
The ratings assume a backdrop of continued gradual recovery of the global economy without a systemic crisis in global emerging markets, including China's regional neighbours, as the Fed "tapers" monetary easing.
Recognising China's emergence onto the global stage, the ratings assume the continuation of an open global trade and financial system.
The ratings assume there is no significant escalation of geopolitical risk, for example a regional conflict involving any of China, Japan or the two Koreas, or instability in key global energy-producing regions that led to a large, sustained rise in energy prices.