Moody's assigns A1 rating to China

In the near term, Moody's revised its growth forecast to 3.5 per cent and 4.8 per cent for 2022 and 2023 respectively to take into account the impact of potential renewed local lockdowns and the constraints on consumption posed by the country's dynamic zero-COVID policy, partially mitigated by an unfolding macroeconomic policy response. Over the medium term, a shrinking population and labour force and slower growth in the property sector than experienced in the past decades will significantly weigh on China's growth potential. 

At the same time, China's institutional and governance strength will be tested, including the quality of executive institutions, to manage a complex set of policy issues including enhancing productivity, reducing leverage, creating an environment in which the property sector can foster sustainable growth and wealth accumulation, promoting environmental sustainability and maintaining social stability, according to a press release by Moody’s. While in all these areas the medium-term policy objectives are supportive of China's debt sustainability, transition risks are material.

China's local- and foreign-currency country ceilings are unchanged at Aaa and Aa1 respectively. The local currency ceiling, four notches above the rating, reflects limited external risks, broadly predictable institutions; offset by a large government footprint and influence in the economy and financial system which could lead to government decisions that are credit negative for non-government issuers.

The foreign currency ceiling, one notch below the local currency ceiling, reflects the net impact of strong policy effectiveness, low external debt but also a history of capital account controls which point to some, albeit limited, transfer and convertibility risks in a low probability scenario of the sovereign facing very significant financial stress. 

Moody's assesses that China's fiscal strength also remains relatively robust, taking into account the fiscal and debt impact of the COVID-19 shock. Moody's estimates that general government debt will amount to 49 per cent of GDP at the end of 2022, compared to 39 per cent in 2019, a moderate increase compared to other sovereigns globally. However, the deterioration in China's broader public debt position has been more significant when considering increases in Local Government Financing Vehicles (LGFVs) and SOE debt, added the release.

For instance, considering the general government and LGFVs together, Moody's estimates that the debt burden will stand at 96 per cent at the end of this year, compared with 74 per cent pre-COVID. These increases in public sector debt reflect the fundamental, long-term issue of mismatches between regional and local government (RLGs) revenue base and their economic and social spending responsibilities.

China faces a wide range of policy challenges to enhance productivity and offset the growth impact of population ageing, reduce leverage in the public sector without jeopardising financial stability, creating an environment in which the property sector can foster sustainable growth and wealth accumulation at manageable growth and social costs, promoting environmental sustainability across its vast and diverse geography and economic structures, and maintaining social stability.

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, and ultimately social, stability risks.

ALCHEMPro News Desk (NB)