This week, rating agency Fitch affirmed its A+ long-term rating for China, with a stable outlook, citing: “robust” external finances, strong macroeconomic performance and China’s size as the world’s second largest economy. In terms of concerns, Fitch noted “structural vulnerabilities” within China’s financial sector, relatively low per capita income, and weaker governance compared with similarly rated nations. However, unlike many other A rated nations, Fitch noted that China has sufficient room to accommodate a short-term rise in its budget deficit until external pressures diminish.
Unchanged from its September estimates, Fitch forecast China’s growth to fall to 5.7% in 2020, from 6.1% this year. Its forecasts are based on the assumption that all current US tariffs including the new 15% tariff, due in December, are in place. Thus, growth could actually beat the rating agency's estimates if a deal is reached to roll back some of the tariffs already in place and/or if China manages to convince Trump to reconsider implementing the next stage of tariffs.
In terms of the longer-term effect on global growth from the US-China trade war, which currently appears a long way from final agreement, Fitch noted that other nations which are exposed to the two economies may see their ratings affected, and there is a risk that the deployment of further fiscal and monetary easing will lead to more debt globally. The report stated: “Assuming global interest rates remain relatively low, government debt dynamics will be driven more by primary balances and economic growth, so the effectiveness of fiscal stimulus in supporting growth will be critical to whether debt ratios rise or fall. In addition to directional changes in debt, ratings could be affected by the degree to which sovereigns have – and draw upon – fiscal space”. This echoes Moody’s concerns earlier in the week: “A deepening slowdown will have a negative effect on the credit quality of sovereign debt in many countries and of regional and local government debt, because of lower tax revenue and a weakening of fiscal positions”.
Given the subdued global growth backdrop, we remain comfortable with our single A rated strategies yielding above 3%. We position our products with, on average, over three notches of credit cushion, to protect from such rating revisions highlighted by the likes of Fitch.