Fitch Affirms China’s A+ Sovereign Debt Rating

Fitch Ratings has affirmed China’s sovereign foreign and local currency bonds rating at A+, with stable outlook, according to an announcement.

China’s foreign reserves rose to US$3,821 billion at the end of 2013. This was equal to 19.2 months of current external payments, the third-highest ratio of any country rated by Fitch globally.

China’s official reserves dwarf public external debt of US$34 billion. Sovereign net foreign assets were worth 44.1% of GDP at the end of 2013, the second-highest ratio among A-rated sovereigns.

But, China’s growth model faces tightening constraints from the increasing leverage in the economy and from the deteriorating ability to absorb additional investment.

China’s economic re-balancing has yet to begin. The contribution of investment to overall GDP growth at 4.2 percentage points, outpacing consumption’s contribution of 3.9 percentage points in 2013.

However, the state-led nature of China’s economy gives Beijing with powerful tools to manage short-term demand, which support the realization of a smooth transition.

China’s GDP growth decelerated to 7.7% in 2012 and 2013, below China’s five-year average of 8.9%, although comfortably above the global emerging-market median for 2013 of 4%.

Fitch estimates the level of aggregate financing in China’s economy at 217% of GDP at the end of 2013, up from 198% at the end of 2012, and 128% at the end of 2008.

Fitch estimates general government debt rose to 53% of GDP at the end of 2013, not far off the ‘A’ range median of 52%.

Beijing has acted more aggressively to contain risks to financial stability since 2013. Steps included allowing greater volatility in interest rates, managing the Chinese yuan’s exchange rate to discourage one-way bet, and allowing defaults in the capital markets.

The People’s Bank of China has indicated a two-year time frame for full deposit rate liberalization.

Fitch says this could be a powerful engine for economic re-balancing by supporting household incomes.

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