Dagong Global Credit Rating Co., Ltd.
May 26, 2017
Dagong Global Credit Rating Co., Ltd. (Dagong) has today decided to maintain its local and foreign currency sovereign credit ratings of the People's Republic of China (China) at AA+ and AAA respectively, both with stable outlooks. China is steadily moving forward with structural reform which reduces any downside risks to the country's economic outlook. Despite rising debt burdens upon the central and local governments, they have been managed at reasonable levels. Therefore, the Chinese government retains its robust local and foreign currency solvency.
1. In the medium term, stable progress to push forward structural reform, as implemented by the Chinese government, will gradually help resolve the development bottleneck and thus guarantee sustainable economic development.
Through 2015-2016's exploration phase, the basic idea behind Chinese structural reform was made clear, that is, domestically cutting excess capacity to make room for upgrading manufacturing and developing the technology industry, while speeding up the global industrial chain layout and broadening economic development space abroad - as based upon the “Belt and Road Initiative". Since 2017, while emphasizing steady growth and ensuring employment, and focusing on "cutting excessive industrial capacity, destocking, de-leveraging, lowering corporate costs, and improving weak links", the Chinese government has further put forward specific requirements and measures for key areas such as excess capacity, agriculture, fiscal policy, finance and the reform of state-owned enterprises in order to speed up the progress of reform. Additionally, it has reached cooperation agreements with many countries and international organizations concerning the development of the “Belt and Road Initiative", and has also proposed a number of initiatives for policy docking, economic corridor construction, project cooperation, financial support, and so on, all of which demonstrate the Chinese government’s determination and perseverance to reform. To summarize, it is expected that the Chinese government will continue to deepen its supply-side structural reform to correct domestic structural imbalance, and push forward the “Belt and Road Initiative" abroad which will expand the country's economic development space in the medium term.
Space for policy adjustment remains abundant. The government’s prudential attitude in balancing progress and stability, and its outstanding capability concerning policy implementation will provide reliable safeguard to economic transformation, as well as the solvency of the government. In order to prevent systemic financial risks and curb asset bubbles, the monetary policy will tend to be prudent in 2017, and for this reason the government needs to focus upon utilizing the fiscal policy’s function as the “economic stabilizer” and “reform booster”. In addition, more space for policy adjustment in containing fiscal risks and carrying forward structural reform is being acquired through the certain practices of the government, including actively introducing foreign capital, promoting financial innovation, carrying forward the PPP model, and strictly containing the local government's debt risk. Meanwhile, the government keeps an eye on economic growth, employment and residents’ living standard during reform so as to improve economic toughness while forging a benign interaction between structural reform and economic growth, eventually removing any inherent resistance against reform. In summary, space for government policy remains sufficient, and the outstanding capability for policy implementation and consolidation will provide strong political and material safeguarding from ongoing structural reform and economic upgrading. As any adjustments to the economic structure near completion and the China's economic compatibility rises, the solvency of the government will be effectively strengthened.
2. With a prudent and neutral monetary policy, the banking sector’s risk of asset quality is under control, and asset bubbles will be contained, rendering the credit environment stable.
People’s Bank of China will continue to tighten its monetary policy under multiple pressures. In response to the capital outflow and devaluation pressure which has been caused by the US Federal Reserve’s interest rate hikes, and likewise to safeguard against financial risks and rein in asset bubbles, China's monetary policy is shifting toward being prudent and neutral in 2017, and is expected to be slightly constrained in the short term.
The risk of asset quality in the banking sector has increased, although strengthening supervision helps to curb and absorb financial risks. As of the end of December 2016, the non-performing loan ratio (NPL ratio), provision coverage ratio, return on assets (ROA), and capital adequacy ratio of commercial banks in China are 1.8%, 175.5%, 0.99%, and 13.3% respectively. These indicators are all at a high level in comparison to those of international peers. In the short term, the cooling down of China's real estate industry, and the reinforcement in regulation and other factors will improve the country's asset quality. It is expected that the NPL ratio in 2017 will remain at 1.8% to 1.9%. Meanwhile, the central bank brought off-balance sheet wealth management businesses into macro-prudential assessment at the end of 2016 and enhanced the supervision of off-balance sheet businesses. The integration of the China Securities Regulatory Commission, China Banking Regulatory Commission, and China Insurance Regulatory Commission's regulations in 2017, which is focused on rectifying circular investment and insurance-type wealth management products, as well as anti-corruption in the financial sector, will be conducive to the steady development of the market in the mid-and-long term.
3.In the short term, China's economy will continue to slow down and stabilize, and the country's structural reform will achieve initial success while continuing to deepen. Economic growth will maintain a relatively high momentum in the medium to long term.
In the short term, "cutting the country's overcapacity and excess inventory, deleveraging, reducing costs and strengthening points of weakness", as well as state-owned enterprise reform will be further deepened, and so it is anticipated that the Chinese economy will continue to slow down and stabilize. Consumption is expected to continue to play the main driving force of short-term economic growth due to the stable growth of real income of residents as well as the upgrading of consumption structure. Since strict real estate controls and regulations have been carried out from October 2016, and a tightening monetary policy in 2017 has raised corporate financing costs, the country's investment growth is expected to slow down in the short-term, and the main driving force will continue to be infrastructure investment.
Benefiting from improving economic conditions in both major economies and emerging countries, China's imports and exports along the “Belt and Road” countries have increased significantly during the beginning of 2017. However, considering the rise of global trade protectionism and uncertainties amongst China-US trade, China’s exports will continue to be under pressure in the short term. In general, it is expected that China's economy will be high in early 2017 and slow down later in 2017, making the country's annual growth rate of 2017 stabilize around 6.5%. Growth in 2018 is expected to remain on par with 2017.
In the medium to long term, deepening structural reforms will ensure that China’s economy will maintain a relatively high growth potential. As the world's second largest economy, China’s longstanding economic structure of high saving rates and high investment has implied a high consumption potential, which will be released with the optimization of its consumption structure. At the same time, China's efforts in pushing ahead the "Belt and Road Initiative" as well as "Public Entrepreneurship and Massive Innovation" will also broaden and deepen existing economic development areas, so as to resolve the problem of lacking effective supply, as has been caused by overcapacity, and stimulate China's developmental potential in its process of achieving modernization.
4. In the short term, although China’s general government fiscal deficit will increase, this increase is manageable. China’s general government debt burden will remain in a reasonable range over the medium term.
Although the fiscal deficit of China’s general government will increase, this increase remains manageable, and debt repayment resources will remain stable. In order to support supply-side reform, seeing as how the government’s ideas concerning governance have been altered, likewise has the country's fiscal policy changed significantly. On the one hand, the government implements structural tax reduction, promotes the mixed ownership reform of state-owned enterprises, and encourages a PPP model, which could strengthen private capital’s positive effect upon economic growth, and encourage the market to play a greater role upon economic regulation. On the other hand, the government actively controls the growth rate of investment expenditure and improves investment efficiency, and therefore places the main focus of its fiscal policy upon ensuring and improving people’s well-being and the construction of the social safety net. The fiscal deficit of China’s general government is expected to be around 3.3% in 2017 and 2018. Following 2018, as economic structure adjustments will have been attained, the government's fiscal deficit will gradually decline, and debt repayment resources will remain stable.
China’s general government outstanding debt is relatively low, and mainly consists of domestic debt, and China’s general government debt repayment capacity is stable. Despite have increased in recent years, China’s general government debt-to-GDP ratio has remained at a low-level, which is 36.7% in 2016, so China has a slight debt service burden. The government debt-to-GDP ratio is projected to increase to 40.0% in 2017 and 42.9% in 2018, respectively, due to the positive fiscal policy. The government’s external debt only takes up 1.2% of the total government’s debt, in other words, the debt structure dominated by domestic debt could effectively reduce external risks. The structure of the local government debt has been optimized, debt management has become more stringent, and risks upon the financial system are being gradually alleviated, all of which are conducive to resolve contingent debt risks of the central government, contributing to the stability of the general government’s solvency. In addition, China’s general government has accumulated massive financial assets from long-lasting fiscal surpluses of the past. According to various statistical assessments, China's general government’s asset is much higher than its debt, and government assets could provide solid guarantee for the government’s solvency.
5. China's foreign debt scale is very low. Its current account surplus, large foreign assets, and the internationalization of the RMB will ensure its strong foreign solvency.
In the medium term, the current account will continue to maintain a small surplus. In the short term, although trade frictions will pose some potential threats upon China's export business, the country's overall global economic stabilization and "The Belt and Road" strategy will jointly promote the steady growth of foreign demand. With stabilization of international commodity prices, the import scale is expected to stabilize. At the same time, with an increased consumption demand for overseas tourism by Chinese citizens, the service trade deficit will gradually stabilize. In addition, the overall income in overseas investment throughout the private sector is expected to increase, and will jointly drive the current account surplus in 2017 and 2018 respectively to be 1.6% and 1.5% of GDP, maintaining a level of about 1.3% in the medium and long term.
Capital and financial accounts turning into deficit will become a “new normal”, and the balance of payments will continue to improve. In the short term, the long-term economic growth potential released by China's reform will continue to make foreign direct investment very attractive for high-end manufacturing. At the same time, international cooperation and capacity development brought on by "The Belt and Road" national strategy will promote Chinese enterprises to enter the international market, and the acceleration of enterprises "going out" paces will promote cross-border financing demand to continue to rise, and further opening up of the capital market will likewise bring about a two-way flow of securities investment to increase. It is expected that China's capital and financial deficit will continue to expand in 2017 and 2018, although the balance of payments will play a positive role in the internationalization of the RMB and the external balance of the economy.
The scale of China's foreign currency debt is very low, while ample international reserves and the country's net foreign debt status will continue to protect the government's foreign solvency. In 2016, China's total foreign debt burden was only 12.7%, reflecting that the overall foreign debt burden was very low. In the short term, despite several factors including interest rate spreads between local and foreign currencies, foreign exchange supply and demand and market expectations, the promotion of the mechanism for setting the market-oriented RMB exchange rate, enhancing exchange rate flexibility, and the formation of cross-border capital flows into a two-way fluctuation pattern, altogether the RMB's devaluation pressure is limited and will not have large impact on external debt solvency. Benefiting from its current account surplus, China has continued to maintain a net debt position, with net claims of 16% of GDP in 2016, an increase of 1.1 percentage points compared to the previous year. Under its international investment position, the stability of China's foreign investment structure is strong, and it is also conducive to resist external impact caused by cross-border capital flows. The Chinese government will thereby maintain its strong foreign currency solvency.