Singapore, September 14, 2020 -- Moody's Investors Service ("Moody's") has today
affirmed China's A1 long-term local and foreign-currency
issuer and senior unsecured ratings and the (P)A1 foreign-currency
senior unsecured shelf rating. The outlook remains stable.
The A1 rating affirmation and stable outlook are supported by Moody's
assessment that the strength of China's institutions and governance,
and in particular the effectiveness of government policies, support
the sovereign's capacity to mitigate the credit risks that result
from ongoing increases in public sector debt, pockets of financial
stress likely to become apparent from time to time, and slowing
growth potential albeit from high rates.
In the near term, institutional capacity combines with financial
buffers provided by a large pool of domestic savings and stable and large
foreign exchange reserves to offset the credit negative consequences of
the coronavirus pandemic. Over the longer term, China's
credit strengths reduce the risks related to ongoing tensions between
the US and China, a reshaping of global supply chains and demographic
pressure.
China's long-term foreign-currency deposit and bond ceilings
remain at A1 and Aa3, respectively, while the local currency
deposit and bond ceilings remain at Aa3. China's short-term
foreign-currency bond and bank deposit rating ceilings remain at
P-1.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION
POLICY EFFECTIVENESS AND FINANCIAL BUFFERS CONTAIN RISKS RELATED TO RISING
PUBLIC SECTOR DEBT
Moody's expects China's economy to grow by only 1.9%
this year, before 7% growth in 2021, with the recovery
driven to a large extent by the public sector at least initially.
As a result, Moody's projects China's public sector
debt, including governments and state-owned enterprises (SOEs),
to rise to 185-190% of GDP in 2020-21, from
167% in 2019. Rising SOE leverage continues to pose contingent
liability risks for the general government as pockets of financial pressure
within the sector test the capacity of the local and central governments
to mobilise resources and stem negative spillovers between sectors.
Moreover, the sharp slowdown in growth and only gradual and halting
recovery is likely to increase pressure on some regional banks,
as already seen during 2019.
While contingent liability risks have been a long-standing feature
of China's sovereign credit profile, and the central government
has sought to enhance the transparency of RLG debt by restricting their
reliance of LGFVs to support investment, the risks are accentuated
by the economic and financial stress posed by the coronavirus pandemic.
The risks are particularly relevant for regional and local government
(RLGs) who continue to face a gap between their financing sources,
including transfers from the central government and bond quotas,
and the cost of investment. These gaps will be filled by SOEs,
including Local Government Financing Vehicles (LGFVs). Financial
and commercial linkages between SOEs, banks and governments point
to a likely sharing of the high debt burdens for some entities.
When regional banks are themselves under stress, RLGs and ultimately
the general government are likely to shoulder a bigger share of the burden.
However, close relationships between these sectors also mitigate
the risks associated with management of bad debts since they broaden the
pool of resources and policy tools available. More generally,
China's macroeconomic policy approach to supporting growth is consistent
with the authorities' stated commitment to limit excess leverage.
While fiscal policy has been eased markedly this year, the stimulus
provided is relatively contained at around 6.5% of GDP according
to Moody's estimates. Moreover, infrastructure spending,
some of which contributes to SOE debt, is likely to spread across
traditional and newer types of fixed assets, and includes investment
in environment, and social infrastructure, reducing the risks
of a renewed rapid accumulation of excess capacity that has plagued China
in the past.
Over the longer term, the ability of the economy to finance higher
levels of debt depends on sustained robust economic growth. China's
growth potential is under pressure from a number of sources. The
starkest pressures are domestic, arising principally from long-term
demographic pressures on China's labour force. More immediately,
external pressures emanate from ongoing tensions with the US and to some
extent other trading partners, which could reduce access to technology
and foreign investment; a reshaping of supply chains, which
could accelerate production relocation away from China; and population
ageing.
While these trends represent significant challenges to China's policy
effectiveness, Moody's judgment remains that policymakers
will succeed over time in in containing the erosion in growth.
The coronavirus has intensified a shift in China's policy emphasis
already underway before the shock, towards support for stable employment
and growth, from policy focused on deleveraging and derisking in
2017-18. Policymakers have increased the emphasis on reforms
in some areas of the economy, facilitating access to foreign firms
in the industrial and finance sectors, which if effective would
contribute to raise competition and support productivity. The ongoing
shift towards consumers and the services sectors combined with the continued
upgrading of technology and digitalization support a shift towards higher
value-added sectors.
Large financial buffers in the form of domestic savings and foreign exchange
reserves support macroeconomic stability and thereby provide time for
policymakers to design and implement reforms.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on China's rating reflects balanced risks at the A1
rating level. In particular, risks to the economic outlook
and relatedly to the public sector's balance sheet appear broadly
balanced over the next 12-18 months.
Over the longer term, Moody's continues to expect leverage in the
economy as a whole to rise gradually, reflecting the increasingly
difficult policy trade-off between deleveraging and maintaining
robust growth. Signs of financial pressure apparent over the past
few years as some local state-owned enterprises and regional banks
faced intense stress may become more frequent and broader-based.
Both public sector debt and household debt are likely to increase.
Set against this, effective execution of economic and financial
sector reforms has the potential to reduce the credit intensity of the
economy and raise long term productivity.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations pose a significant challenge to China's authorities
and over the long-term may raise fiscal costs, constrain
economic growth in some regions and consequently the credit outlook.
Key areas include significant remediation costs related to the long-term
impact of industrial development on air quality, soil degradation
and water quality. Moreover, climate change manifests in
severe floods, which risks undermining investment if they become
increasingly frequent.
All of these facets of environmental damage have the potential to raise
health care costs over the longer term at a time when the ageing population
is putting additional demands on China's health-related spending.
In general, social considerations are material to the credit,
given the authorities' focus on maintaining social stability through economic
growth. Policy has focused on supporting employment at the aggregate
level and assisting adjustment where unemployment has been a consequence
of policy or structural change in the economy. China also faces
challenges relating to its ageing population and shrinking workforce.
These will increasingly weigh on potential growth and threaten large increases
in social security spending.
Governance considerations are material to China's rating and a driver
of today's action. Ongoing policy coordination and execution
between various levels of government is necessary to align spending responsibilities
and revenue raising capacity. Effective communication between regional
governments and central authorities is also necessary to mobilize sufficient
and timely resources to contain contingent liability risks.
GDP per capita (PPP basis, US$): $19,564
(2019 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.1% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.5%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -2.8%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.0% (2019 Actual) (also
known as External Balance)
External debt/GDP: 14.3% (2019 Actual)
Economic resiliency: a2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 9 September 2020, a rating committee was called to discuss the
rating of the China, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutions and governance strength have not materially
changed. The issuer's fiscal or financial strength has not materially
changed. The issuer's susceptibility to event risks has not materially
changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING UP
An increasing likelihood that structural reforms will reduce public sector
leverage and contingent liability risks could lead to an upgrade.
In particular, evidence of increasingly effective coordination within
the public sector to achieve key policy objectives and address emerging
financial stress would be a credit positive signal of such an outcome.
WHAT COULD CHANGE THE RATING DOWN
Conversely, negative pressure could stem from evidence that the
medium-term growth rates that the government aims to maintain will
either not be achieved, or will be achieved through further material
increases in leverage, which would exacerbate economic distortions
and raise financing stability risks. In this scenario, the
risk of financial tensions and contagion between sectors and regions may
rise, especially if the flow of information about financial health
at a local level and the transmission of decisions are slow.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are unsolicited.
a.With Rated Entity or Related Third Party Participation:
YES
b.With Access to Internal Documents: YES
c.With Access to Management: YES
For additional information, please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Martin Petch
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
