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Rating Action:

Moody's affirms China's A1 rating, maintains stable outlook

 The document has been translated in other languages

14 Sep 2020

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

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.

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