HONG KONG, 9 September 2024. CSPI Ratings has affirmed China’s ‘AA’ global-scale long-term local and foreign currency issuer credit rating (ICR) and ‘A-1+’ short-term local and foreign currency ICR. At the same time, we have also affirmed ‘AA’ ratings to below nine USD denominated bonds and three EUR denominated bonds issued by the Ministry of Finance of China:
1. USD1.00 billion maturing on 19 October 2028
2. USD500 million maturing on 19 October 2048
3. USD2.25 billion maturing on 21 October 2025
4. USD2.00 billion maturing on 21 October 2030
5. USD500 million maturing on 21 October 2050
6. USD1.00 billion maturing on 26 October 2024
7. USD1.50 billion maturing on 26 October 2026
8. USD1.00 billion maturing on 26 October 2031
9. USD500 million maturing on 26 October 2051
10. EUR1.50 billion maturing on 17 November 2024
11. EUR1.50 billion maturing on 17 November 2028
12. EUR1.00 billion maturing on 17 November 2033
The outlook for all ratings is stable.
China’s ratings supported by its large and diversified economy, robust economic growth prospectives, optimising fiscal debt structure, effective monetary and general institutions, as well as extremely low external position risks. The ratings are constrained by China’s relatively low per capita income and potentially substantial contingent liabilities.
KEY CREDIT HIGHLIGHTS
Economic Fundamentals: Navigating Short-term Growth Challenges while Pursuing Structural Reforms for High-Quality Growth
China’s large and diversified economy continues to demonstrate resilience in the face of a variety of challenges. GDP growth is projected to reach the official target of 5.0% in 2024, driven primarily by robust exports and strong manufacturing investment. However, subdued private consumption, resulting from negative wealth effects from the property sector contraction and weakened expectations for income growth, remains a drag on short-term growth.
We expect China's GDP growth to stabilize in a 4.5% to 5% range between 2025 and 2027. The Chinese economy is undergoing a crucial transition from ‘high-speed growth’ to ‘high-quality growth’. With the introduction of comprehensive deepening reform measures, China’s economy is poised to shift from recovery growth to normalised expansion. In terms of economic structure, China's endogenous economic momentum will become more pronounced, as reflected in sustained rapid growth of investments in new energy, equipment manufacturing, digital economy, and other high-tech industries in recent years. We believe that the enhancement of total factor productivity, driven by new quality productive forces, is likely propel long-term high-quality growth in China’s economy.
Fiscal Profile: Rising Public Debt with Improving Structure, Fiscal and Tax System Reforms Key to Enhancing Fiscal Sustainability
China's local governments continue to face a delicate equilibrium between their fiscal revenue and expenditure due to declining land sales revenue and negative growth in tax revenue. We expect the general fiscal deficit ratio to rise from 7% in 2023 to 8.4% in 2024. Local government fiscal expansion in 2024 relies on the issuance of ultra-long-term special treasury bonds by the central government and increased issuance of local government bonds, which will likely push up general government debt. We estimate that the general government net debt as a percentage of GDP will rise to 55% in 2024 from 51.5% in 2023. Considering the planned continuous issuance of ultra-long-term special treasury bonds, we expect that the ratio may increase slightly over the next 2-3 years but is not expected to exceed 60%.
We believe that the future development of China's public sector debt structure will be characterised by the central government taking the initiative to increase debt, local governments appropriately increasing explicit debt, and strict control over the growth of local contingent liabilities. Currently, the leverage ratio of China's central government is at a relatively low level, allowing room for increased leverage. In addition, the central government will play a significant role in better implementing countercyclical macroeconomic adjustments. The evolution of China’s public sector debt structure is conductive to structurally reducing government financing costs and mitigating the risks of local government contingent liabilities, in our view.
The fiscal and taxation reform proposed at the Third Plenum aims to balance the administrative and financial powers between the central and local governments, and strengthen local fiscal autonomy. This reform provides local governments with more incentives to increase fiscal revenue and greater flexibility in enhancingexpenditure. Among them, the consumption tax reform is expected to benefit local governments in promoting local consumption and further stimulating economic vitality. We believe that the reform will play a positive role in balancing the powers of different levels of government and improving fiscal expenditure efficiency.
External Liquidity: Low External Debt, Sustained Current Account Surplus, and RMB Internationalization Strengthen China’s External Position
China is a major net external creditor and the largest holder of foreign exchange reserves globally, with a very low external debt burden. In recent years, China's balance of payments has remained robust for its corresponding stage of economic development, with the current account balance consistently in surplus. In the first half of 2024, China's import and export volume grew significantly by 6.1% year-on-year. In terms of the trade structure, the growth rate of general trade with higher added value was significantly higher than processing trade in the first half of the year, indicating that China's critical position in global trade and manufacturing remains robust. We expect that China’s current account surplus as a percentage of GDP in 2024 will be 1.3%, and its basic current account balance as a percentage of GDP will remain positive over the next 2-3 years, indicating that China's external liquidity remains strong.
We believe the increasing global use of renminbi (RMB) will strengthen China’s external financing capacity. According to the latest statistics from the IMF, RMB ranks sixth among the global foreign exchange reserves with disclosed currency composition, signifying widespread recognition of the RMB’s status in the international monetary system. Consequently, the international payment function of RMB has been strengthened. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), starting from November 2023, the RMB surpassed the Japanese Yen to become the fourth largest international payment currency. In 2023, the RMB’s share of international payments was 3.05%, an increase of 0.74 percentage points from the previous year.
Institutions and Policies: Adaptively Balancing Short-term Growth Stability and Long-term High-quality Development amid Economic Transition Period
We believe China's institutions and policies will continue to be adaptive and effective despite the increasingly complex policy landscape. This resilience stems from a proven track record of successful policy implementation, underpinned by centralized decision-making, long-term planning, and extensive control over key economic resources, ultimately enabling the government to effectively address challenges and support long-term economic development.
Currently, China is traversing a crucial economic transition phase. The central government is adopting flexible macroeconomic policies to ensure a smooth shift towards a “new normal” of more balanced and sustainable growth. The Third Plenum has emphasized economic system reforms as a driving force, with an increased focus on ‘high-quality development’, ‘new quality productive forces’, and ‘fair competition.’ We believe that these reform initiatives are conducive to stimulating intrinsic dynamism and innovation across various sectors, which will help enhance the long-term growth potential of China’s economy.
The resolution of the Third Plenum maintains policy continuity while introducing targeted adjustments to address current economic transition challenges, reflecting the adaptability of China's institutions and policies. Furthermore, the target of completing these reforms by 2029, a significantly shorter timeframe than previous plans, demonstrates the government’s strong commitment to deepening comprehensive reform.
RATING OUTLOOK
The stable outlook reflects our assessment that China will navigate through the economic transition period and the institutions and policies will continue to be quite adaptive and effective in addressing key challenges.
We could lower the rating if fiscal condition deteriorates significantly as a result of increasing debt burden or if the government resorts to aggressive credit expansion to boost economic growth, which would raise financial stability risks and dampen economic sustainability.
We could raise the rating if China achieves effective reform in improving its institutions and policies, particularly through strengthening governance, improving the division of roles between government and market, and enhancing the availability and quality of key data, or if it achieves structural reform in boosting its economic growth while reducing financial stability risks.
Note: The ratings mentioned above are unsolicited.
ANALYSTS CONTACT
Primary Analyst
Ke Chen, PhD
+852 3615 8316
Secondary Analyst
Leon Li, CFA
+86 755 2348 3867
Committee Chair
Winnie Guo
+852 3615 8341
MEDIA CONTACT
RATING SERVICE CONTACT
Allen Wei
+852 3615 8324
allen.wei@cspi-ratings.com
Date of Relevant Rating Committee: 30 August 2024
Additional information is available on www.cspi-ratings.com
Related Criteria
Sovereign Rating Criteria (30 May 2018)
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