Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit rating’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the People’s Republic of China (long-term local- and foreign-currency issuer and senior unsecured debt ratings of A and Stable Outlook; short-term local- and foreign-currency issuer ratings: S-1 and Stable Outlook) on 16 January 2025.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

The People’s Republic of China’s single-A credit ratings are underpinned by the following credit strengths: i) a large and diversified economy with comparatively-high trend growth; ii) significant external-sector resilience, underpinned by the largest stock of foreign-exchange reserves globally, alongside rises of the renminbi and Chinese sovereign securities as a reserve currency and safe asset respectively; iii) the central government’s effectively unique capacity for facilitating targeted reforms to influence economic and financial stability and enhance its implicit resources under stressed financial conditions; and iv) the low levels of explicit sovereign debt. Such factors support sovereign capacity in addressing significant outstanding financial imbalances within the economy including high and rising levels of economy-wide indebtedness and the sharp housing-market downturn. In its efforts at engineering a continued ‘soft economic landing’, the government faces the tough balancing act of deleveraging the economy and government balance sheet, all the while sustaining politically- and socially-acceptable rates of output growth.

Challenges associate with: i) the wide public-sector deficits and rising levels of both general and central government debt; ii) financial-system imbalances, considering elevated levels of economy-wide non-financial sector debt, high rates of corporate defaults and the property-sector crisis; iii) overly-high annual growth objectives and deflation risk; and iv) adverse demographics including a declining population.

China’s challenges linked to the property sector and debt-related imbalances suggest output growth needs to moderate gradually. Scope estimates the economy’s medium-run growth potential at around 4% a year, below the government’s self-imposed annual target foreseen being around 5% for 2025. Real growth was reported at 5% last year – meeting an official target of “around 5%” – and is seen being followed by 4.6% growth this year before 4.3% next year, restrained by anticipated trade conflicts forthcoming.

Persistent pressures in the real-estate sector are exposing vulnerabilities, including debt-repayment challenges by systemically-important property developers and payment delays or defaults among the shadow banks. In addition, declines in land sales also raise the likelihood that local governments might encounter increasing financial strains, requiring the support of the central government. Scope foresees continued direct or indirect support from the authorities to help mitigate systemic risks.

The Stable Outlook represents the view that risks for the ratings are balanced.

The long-term ratings/Outlooks could be downgraded if, individually or collectively: i) the maintenance of unsustainably-high economic growth objectives sees the continuity of a weak budgetary outlook and continued rapid rises of central and general government debt; ii) a significant financial and/or economic crisis materialises, impairing financial-system stability; and/or iii) China’s external-sector resilience weakened materially or geopolitical risks rise.

Conversely, the ratings/Outlook could be upgraded if, individually or collectively: i) the renminbi and Chinese government bonds made substantive gains as reserve currency and global safe asset respectively; ii) the public finances strengthen materially, significantly slowing the rising trajectory of general government debt; and/or iii) economic and financial reforms re-anchored financial stability and sustainable long-run growth.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Dennis Shen, Senior Director

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