RAM Berhad : Ratings reaffirms China’s global and Asean-scale ratings

Published on 06 January 2016

RAM Ratings has reaffirmed China's respective gAA3(pi)/stable and seaAAA(pi)/stable global- and ASEAN-scale sovereign ratings. The ratings are premised on China's strong economic fundamentals and growth momentum, its commitment to reforms and liberalisation, and the country's superior external strength. These positives are, however, moderated by the country's highly leveraged economy with substantial sovereign contingent liabilities, and risks of a disorderly correction of an oversupplied property market and its implications on economic growth, employment and financial stability.

'China's economic rebalancing drive remains on track, with the services sector, supported by healthy private consumption, expanding its share of GDP over other sectors in 2015,' notes Esther Lai, RAM's Head of Sovereign Ratings. Meanwhile, the property sector's correction and the unwinding of excess industrial capacity are being cautiously managed by the government to avoid the risk of a spillover to the real economy and the financial system. China's increasing prominence in global trade and finance coupled with exchange rate reforms, have contributed to the yuan's recent inclusion in the currency basket of the IMF Special Drawing Rights.

China's external strength is underlined by foreign-reserve holdings to the tune of USD3.8 trillion as at end-2014 (37.3% of GDP) - the world's largest - the country's net external creditor position (17.2% of GDP) and a light external debt load. While the gradual easing of capital account restrictions will increase capital outflows and lower China's external surpluses ahead, its external reserves are still expected to be maintained at a very healthy level.

However, China's augmented government finance - taking into account the off balance sheet financial positions of local governments - is worse off compared to peers, as seen in its fiscal deficit and debt load which stood at a respective 7.3% and 56.6% of GDP as at end-2014. While the country's fiscal management remains challenging, ongoing policies aimed at limiting off balance sheet government financing are deemed positive in reducing fiscal vulnerabilities in the longer term, if steadfastly implemented. Elsewhere, the government is exposed to substantial contingent risks stemming from the liabilities of government-linked entities (GLEs) which amounted to 116.5% of GDP as at end-September 2015. The crystallisation of these liabilities either directly impacts the general government balance sheet, or indirectly through state-owned banks which have sizeable lending exposure to GLEs.

China's ratings will be moved upwards if economic rebalancing improves structural weaknesses and moderates risks from sovereign contingent liabilities. Continuous reforms to curtail vulnerabilities in local government fiscal management are also deemed credit positive. However, the ratings will face downward pressure if economic rebalancing triggers adverse shocks that derail the GDP growth momentum, which in turn leads to severe credit deterioration and heightened contagion risk in the financial system. The crystallisation of contingent liabilities that significantly weakens government will also weigh on the ratings.

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Published by RAM Rating Services Berhad
© Copyright 2016 by RAM Rating Services Berhad

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