Capital Intelligence, the international credit rating agency, has raised
The ratings reflect
The Chinese economy has grown by more than 10% in real terms in each of the past four years and is on course to do so again in 2007. Medium- to long-term growth prospects are favourable, though in the near-term the authorities may need to take further pre-emptive action to reduce the risk of the economy overheating. CI notes that China’s economic reform process is proceeding at a gradual but steady pace and policy direction is broadly predictable. The authorities have started to pay more attention to the quality and sustainability of economic growth and are seeking to reduce the economy’s reliance on fixed investment and exports.
Sovereign creditworthiness is underpinned by the country’s comfortable net external creditor position, with foreign assets (excluding identifiable equity investment) valued at almost five times the stock of gross external debt. External assets are concentrated in the public sector and dominated by official foreign exchange reserves which, at USD 1.3 trln in June 2007(about 46% of GDP), are the largest in the world and provide a formidable last line of defence against external shocks. Gross external debt is modest at 28% of current account receipts (CARs) or 12% of GDP at the end of 2006, of which about one-tenth is government debt. The authorities are expected to continue accumulating foreign assets at a steady rate over the medium term given the country’s highly competitive and evolving export base, increasing attractiveness to foreign investors, and tightly managed exchange rate.
The budget deficit and government debt stock are reasonably low, at a projected 1% of GDP and 22% of GDP, respectively, in 2007. Although direct government debt is modest, the sovereign’s exposure to contingent liabilities is substantial and includes the non-performing assets of state-owned financial institutions, bonds issued by government policy banks, the debt of local governments, and the external debt of state-owned entities.
That said, the authorities’ capacity to safely absorb contingent liabilities is greatly enhanced by the government’s comfortable fiscal position and vast foreign assets.
Moreover, the expected value of potential liabilities has decreased over recent years with enterprise restructuring, financial sector reforms and the recapitalisation of the banking sector.
Notwithstanding the substantial progress over the past decade, CI notes that GDP per capita in China is fairly low at around USD 2,000, underemployment is high, poverty, though falling, remains a major problem and there are large and growing income disparities between urban and rural areas.
The country’s social safety net is poorly designed, insufficient in coverage and inadequately funded. Weak corporate governance and underdeveloped risk management procedures are sources of systemic risk. In addition, fiscal relations between the various layers of government are poorly defined and reforms to fiscal-transfer and revenue-sharing arrangements are badly needed to support balanced socio-economic development and reduce central government contingent liabilities.
