Overview

Policy changes have helped to rein in credit growth and reduce the 
reliance of economic growth on public investment. If these trends 
continue, risks to Chinese economic and financial stability could 
moderate.
Nevertheless, the track record of slower credit expansion is still very 
short. New credit to both government and non-government sectors remains 
high and could accelerate if economic growth slows further.
We affirm our 'A+/A-1' sovereign credit ratings on China.
The stable outlook reflects our view that China will maintain its robust 
headline GDP growth and improved fiscal performance in the next three to 
four years.

Rating Action

On Sept. 21, 2018, S&P Global Ratings affirmed its unsolicited 'A+' long-term 
and 'A-1' short-term sovereign credit ratings on the People's Republic of 
China. The outlook is stable.

Outlook

The stable outlook reflects our view that China will maintain its robust 
headline GDP growth and improved fiscal performance in the next three to four 
years. We expect per capita real GDP growth to stay above 5% annually, even as 
public investment growth slows further. In addition, we anticipate the 
stricter implementation of restrictions on subnational government off-budget 
borrowing to lead to a declining trend in the fiscal deficits, as measured by 
changes in general government debt in terms of GDP.

We may raise our ratings on China if credit growth slows significantly and is 
sustained well below the current rates while real GDP growth remains healthy. 
In this scenario, we believe risks to financial stability and medium-term 
growth prospects will lessen.

A downgrade could ensue if we see a higher likelihood that China will ease its 
efforts to stem rising financial risk and allow higher credit growth to 
support economic expansion in a manner that is unsustainable in the longer 
term. We expect such a trend would weaken the Chinese economy's resilience to 
shocks, limit the government's policy options, and increase the likelihood of 
a sharper decline in the trend growth rate.

Rationale

The ratings on China reflect our view of the government's reform agenda, 
growth prospects, and strong external metrics. On the other hand, we weigh 
these strengths against certain credit factors that are weaker than what is 
typical for similarly rated peers. For example, China has lower average 
income, less transparency, and a more restricted flow of information.

Institutional and Economic Profile: Reforms to budgetary framework and financial sector in progress

China's policymaking has helped it to maintain consistently strong 
economic performances since the late 1970s.
We project China's per capita GDP to rise to US$12,700 by 2021, from a 
projected US$10,200 for 2018.
We expect real GDP per capita growth to remain above 5% annually in the 
next three years. We believe the current growth trajectory is less driven 
by rapidly increasing credit disbursed by the depository corporations 
than in previous years.

The Chinese government is taking steps to bolster its economic and fiscal 
resilience. We view the government's anti-corruption campaign as a significant 
move to improve governance at state agencies, local governments, and 
state-owned enterprises (SOEs). Over time, this could translate into greater 
confidence in the rule of law, improvements in the private-sector business 
environment, more efficient resource allocation, and a stronger social 
contract.

The government continues to make significant reforms to its budgetary 
framework and the financial sector. Apart from the anti-corruption campaign, 
the government has also punished officials who were involved in debt-raising 
activities outside the guidelines of the central government. These changes 
could yield long-term benefits for China's economic development.

The government also appears to be signaling that it will allow SOEs with 
lesser policy importance to exit the market either through merger, closure, or 
default in order to allocate resources more efficiently. More recently, it has 
also indicated financial stability as a top policy priority and is acting to 
rein in growth of public sector borrowing. However, we believe some local 
government financing vehicles, despite their diminishing importance, continue 
to fund public investment with borrowings that could require government 
resources to repay in future.

China's policymaking has helped it to maintain consistently strong economic 
performances since the late 1970s. However, coordination issues between the 
ministries and the State Council sometimes lead to unpredictable and abrupt 
policy implementation. The authorities also have yet to develop an effective 
communication channel with the market to convey policy intent, heightening 
financial volatility at times. Moreover, China does not benefit from the 
checks and balances usually emanating from the free flow of information. These 
characteristics can lead to the misallocation of resources and foster 
discontent over time.

We expect China's economic growth to remain strong at close to 6% or more 
annually through at least to 2020, corresponding to per capita real GDP growth 
of above 5% each year. We also expect credit growth in China to be a little 
above that of nominal GDP over this period. S&P Global Ratings projects 
China's per capita GDP to rise to above US$12,500 by 2021, from an estimated 
US$10,200 for 2018, given our assumptions about growth and the continued 
strength of the renminbi's real effective exchange rate.

Over the next three years, we expect final consumption's contribution to 
economic growth to increase. The government's focus on cutting capacity in 
some industrial sectors, stricter controls on local government investment, and 
a moderation in commercial real estate activities have lowered growth of fixed 
asset investments. However, we believe gross domestic investment is likely to 
remain above 40% of GDP in the next few years.

China's deleveraging policy has also reduced credit growth. While renminbi 
lending growth at depository corporations has slowed somewhat since mid-2017, 
the policy's impact falls largely on off-balance sheet credit growth. 
Reflecting this, the broad aggregate financing measure saw growth receding to 
10.3% in July 2018 from above 13% in July 2017. Nevertheless, the track record 
of lower credit growth is still very short. Growth of credit to both 
government and non-government sectors remain high and could accelerate if 
economic growth slows further.

A potential significant easing of the deleveraging policy would pose a risk to 
China's term credit metrics. The U.S.-China trade dispute has made little 
impact on Chinese economic growth so far. However, if a further deterioration 
in trade relations results in greater uncertainty, the government could adjust 
economic policy to limit the negative impact on sentiment and employment. One 
such possible policy change is to reduce the intensity of the pressures on 
credit growth that have been in place for more than a year. If credit growth 
rebounds strongly as a result, the consequent weakening of financial stability 
could undermine the government's credit support.

Flexibility and Performance Profile: External profile remains key strength

We expect liquid financial assets held by the public and financial 
sectors to exceed total external debt by nearly 90% of current account 
receipts (CAR) at the end of 2018. At the same time, we estimate China's 
total external assets will exceed its external liabilities by close to 
65% of its CAR.
In 2018-2021, we project net general government debt to increase in each 
of these years at 2.6%-3.4% of GDP. In our estimates, net general 
government debt will fall toward 48% of GDP in the period to 2021, and 
interest cost to government revenue will remain below 5% throughout the 
forecast horizon.
In our view, China's monetary policy is largely credible and effective. 
We believe the liberalization of deposit rates at banks in recent years 
is an important reform that could further improve monetary transmission 
in China.

China's external profile remains a key credit strength, reflecting its 
position as a large external creditor. We expect financial assets held by the 
public and financial sectors to be close to 90% of CAR at the end of 2018. At 
the same time, we estimate that China's total external assets will exceed its 
external liabilities by nearly 65% of its CAR. Its external liquidity position 
is equally robust. We expect the country to sustain its current account 
surplus at more than 1% of GDP in 2018-2021. We project annual gross external 
financing needs in 2018-2021 to total less than 65% of CAR plus usable 
reserves.

The increasing global use of the renminbi (RMB) also bolsters China's external 
financial resilience. According to the Bank for International Settlements' 
(BIS) "Triennial Central Bank Survey," published in 2016, the renminbi was 
traded in 4% of foreign exchange transactions globally. We therefore assess 
the RMB as an actively traded currency. Demand for renminbi-denominated assets 
from both official and private-sector creditors could rise with the inclusion 
of the renminbi in the IMF's Special Drawing Rights basket of currencies since 
2016. 

We expect the share of renminbi-denominated official reserves to rise over 
time. If the renminbi achieves reserve currency status (which we define as 
more than 3% of aggregated allocated international foreign exchange reserves), 
it could strengthen external and monetary support for the sovereign ratings. 
Although the People's Bank of China (the central bank) does not operate a 
fully floating foreign exchange regime, it has allowed greater flexibility in 
the nominal exchange rate over the past decade.

China is gradually implementing an ambitious fiscal reform to improve fiscal 
transparency, budgetary planning and execution, and subnational debt 
management. These reforms could help the government to manage slower growth of 
fiscal revenue and lower local governments' reliance on revenue from land 
sales.

In 2018-2021, we expect the Chinese government to keep the reported general 
government deficit close to, or below, 3% of GDP. However, off-balance-sheet 
borrowing could continue during this period. This reflects both the financing 
needs of public works started before 2015 as well as some new projects that 
the central government is willing to authorize to support growth.

The heavy use of off-balance sheet capital spending by local governments 
complicates the estimation of general government debt in China. In our view, 
the official disclosure of this indicator underestimates the fiscal debt 
burden as debts incurred by local government financing vehicles (LGFVs) for 
public investment are not included. For this reason, we have added our 
estimates of such debts to the official general government debt. We have also 
included the debts of China Railway Corp. in general government debt. The 
company was previously the Ministry of Rail but was incorporated as a special 
industrial enterprise. Bonds issued by the company are held on China banks' 
books at a lower capital charge compared with other corporate debt. We have 
also added some debts related to the establishment of the national asset 
management companies more than a decade ago.

We offset these debts to compute net general government debt with fiscal 
deposits held by the government, net assets of the China Investment Corp., net 
assets of the National Council of Social Security Funds, and our estimate of 
liquid assets held by LGFVs. Using this method, we project net general 
government debt will fall toward 48% of GDP in the period to 2021 and interest 
cost to government revenue will remain below 5% throughout the forecast 
horizon. These forecasts in turn follow from our assumptions regarding real 
growth and ample domestic liquidity keeping financing costs low for the 
government. Based on the estimates above, we project the increase in net 
general government debt in each of these years at 2.6%-3.4% of GDP.

Although the fiscalization of the LGFVs and China Railway Corp. has raised our 
figure for general government debt, it has simultaneously decreased our 
estimates for contingent liabilities to the government from this sector. 
Entities with weak financial metrics owe much of the financing vehicle loans 
that are being redeemed through government bond issuance. By putting these 
loans on the government's balance sheet, the government has significantly 
reduced the banks' credit risks, in our view. Based on our assessment of 
China's Banking Industry Country Risk at '6' and the banking sector's balance 
sheet size of just above 300% of GDP, we see limited contingent liabilities 
coming from the financial system.

We believe China's monetary policy is largely credible and effective, as 
demonstrated by its track record of low inflation and its pursuit of financial 
sector reform. Consumer price index inflation is likely to remain below 3% 
annually over 2018-2021. Although the central government--through the State 
Council--has the final say in setting interest rates, we believe the central 
bank has significant operational independence, especially regarding 
open-market operations. These operations affect the economy through a largely 
responsive interbank market and a sizable and fast-expanding domestic bond 
market. The liberalization of deposit rates at banks in recent years is an 
important reform that could further improve monetary transmission in China.

Key Statistics

Table 1

Ratings Score Snapshot

Table 2

Related Criteria

Criteria - Governments - Sovereigns: Sovereign Rating Methodology, Dec. 
18, 2017
General Criteria: Methodology For Linking Long-Term And Short-Term Ratings
, April 7, 2017
General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
General Criteria: Methodology: Criteria For Determining Transfer And 
Convertibility Assessments, May 18, 2009

Related Research

Sovereign Ratings History, Sept. 5, 2018
Sovereign Ratings List, Sept. 5, 2018
Sovereign Risk Indicators, July 5, 2018. An interactive version is also 
available at http://www.spratings.com/sri
Default, Transition, and Recovery: 2017 Annual Sovereign Default Study 
And Rating Transitions, May 8, 2018
Global Sovereign Rating Trends: First-Quarter 2018, April 11, 2018
Sovereign Debt 2018: Global Borrowing To Remain Steady At US$7.4 Trillion,
 Feb. 22, 2018

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision. 

After the primary analyst gave opening remarks and explained the 
recommendation, the Committee discussed key rating factors and critical issues 
in accordance with the relevant criteria. Qualitative and quantitative risk 
factors were considered and discussed, looking at track-record and forecasts. 

The committee's assessment of the key rating factors is reflected in the 
Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria And Research'). 

Ratings List

Ratings Affirmed

China
 Sovereign Credit Rating |U             A+/Stable/A-1      
 Transfer & Convertibility Assessment
  Local Currency |U                     A+                 

China
 Senior Unsecured |U                    A+                 


|U   Unsolicited ratings.

This unsolicited rating(s) was initiated by a party other than the Issuer (as 
defined in S&P Global Ratings' policies). It may be based solely on publicly 
available information and may or may not involve the participation of the 
Issuer and/or access to the Issuer's internal documents. S&P Global Ratings 
has used information from sources believed to be reliable based on standards 
established in our policies and procedures, but does not guarantee the 
accuracy, adequacy, or completeness of any information used.

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action 
can be found on S&P Global Ratings' public website at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.