Singapore, November 17, 2020 -- Moody's Investors Service ("Moody's") has assigned
a rating of A1 to the proposed senior unsecured, euro-denominated
bonds to be issued by the Government of China ("China"). The notes
will rank pari passu with all of the China's current and future senior
unsecured debt.
The ratings mirror China's issuer rating of A1 with a stable outlook.
RATINGS RATIONALE
China's (A1 stable) credit profile incorporates 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.
Moody's expects China's economy to grow by only 2.2% 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.
While these trends represent significant challenges to China's policy
effectiveness, Moody's judgment remains that policymakers will succeed
over time 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.
ISSUER RATING OUTLOOK
The stable outlook reflects that episodes of financial stress for some
local banks or SOEs are likely to continue to test the capacity of the
central and regional governments to prevent contagion. However,
large fiscal and foreign exchange reserves, and the government's
control of parts of the economy and financial system lend effectiveness
to measures aimed at stemming financial stability risks. 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 balance sheet appear broadly balanced over the next 12-18
months.
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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An increasing likelihood that structural reforms will reduce public sector
leverage and contingent liability risks could lead to an upgrade of China's
rating. 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.
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.
This credit rating and any associated review or outlook has been assigned
on an anticipated/subsequent basis. Please see the most recent
credit rating announcement posted on the issuer's page on www.moodys.com,
under the research tab, for related economic statistics included
in rating announcements published after June 3, 2013.
This credit rating and any associated review or outlook has been assigned
on an anticipated/subsequent basis. Please see the most recent
credit rating announcement posted on the issuer's page on www.moodys.com,
under the research tab, for related summary rating committee minutes
included in rating announcements published after June 3, 2013.
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.
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
