Fitch Ratings on Wednesday affirmed its A+ rating on China, and said tighter regulations have curbed financial risks without jeopardising growth targets, but warned that it remains to be seen if Beijing would stay committed to debt stabilisation.
China’s economic growth accelerated last year and comfortably beat the government’s target, giving policymakers leeway to crack down on riskier lending practices and slow credit expansion.
A key driver of that growth came from improved external demand, with net exports making a positive contribution to the expansion in gross domestic product compared with a negative contribution in 2015-2016.
But Fitch warned trade tensions with the United States have “clearly” risen, posing a downside risk to the ratings agency’s baseline outlook.
While Fitch expects the Chinese economy to grow 6.5 percent this year – in line with Beijing’s target of around 6.5 percent – and is keeping its stable outlook on China’s rating, it did not rule out the prospect of Beijing falling back on the old engines of credit-fuelled investment and policy stimulus and postponing commitments to stabilise leverage ratios.
“The true test for policy, and the direction of the sovereign rating, will hinge on whether the current bias towards tighter financial regulation endures what Fitch anticipates will be a sequential slowdown in the growth outlook over 2018-2019,” Fitch said.
China is moving beyond its traditional dependence on rapid credit growth and investment and will rely less on stimulus to boost its economy in future, outgoing People’s Bank of China Governor Zhou Xiaochuan said on March 9.
The central bank’s new governor, Yi Gang, a protege of Zhou, is widely expected to maintain policy continuity.
China is also merging two financial regulators to tighten oversight of the country’s $42 trillion banking and insurance sectors in a milestone move.
Xi Jinping, now in his second five-year term as China’s president, has said financial security is vital to national security.
Premier Li Keqiang, at the close of the annual National People’s Congress (NPC), or parliament, on Tuesday also reiterated that regulators will take “resolute” measures to tackle financial risks.
But Fitch said the implication for economic policy from Xi’s consolidation of power – which has led to the removal of the presidential two-term limit at this year’s NPC – remains uncertain.
“In the short run, more centralised decision-making could speed up difficult supply-side and service-sector reforms. However, faster and more centralised decision making also raises the risk of policy mistakes as China’s economy grows in size and complexity,” Fitch said.