MARC Ratings affirms China’s sovereign rating at AAA

MARC Ratings has affirmed the People's Republic of China's (China) sovereign rating at AAA with a stable outlook based on its national rating scale. The AAA rating reflects several credit strengths that include the country's large, diversified and internationally competitive economy, proactive fiscal and monetary approaches, and robust external position.

As the world's second-largest economy, China remains a leading manufacturing production centre with the world's largest consumer market and deep integration in the global value chain. With continued current account surpluses backed by its competitive international trade, China remained a net external creditor supported by the world's largest foreign exchange reserves. Along with the complete lifting of pandemic-related restrictions in 2023, China's gross domestic product grew at 5.2%, exceeding the official conservative projection of 5.0%. The government's proactive approach to fiscal and monetary policies would remain pivotal in stabilising the economy, particularly in mitigating the negative impact from the real estate sector.

The financial stress in the real estate sector in recent years has constrained local government revenue, which relies on land sales, raising fiscal sustainability concerns. China ramped up property stimulus measures, including restructuring programmes for distressed developers and providing incentives to affected homebuyers. However, a high level of real estate loans at 22.2% of total financial institution loans in 2023 is at risk of distress despite the deleveraging trend. Given fiscal efforts to maintain economic recovery on track, government debt is likely to remain on an uptrend, with contingent liabilities of local governments remaining a key risk. In addition, the continuously shifting geopolitical landscape and ongoing trade fragmentation could pressure China's external sector.

China's stable outlook reflects the government's resources to respond to economic and financial stress given its control over the country's economic, financial, and political systems. Evidence of improved long-term local government debt management and the success of economic rebalancing reform will be credit positive. However, potential reform reversals, worsening geopolitical and trade tensions, and a further deepening real estate crisis will be credit negative.