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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.