China’s country-risk score still sliding


Jeremy Weltman
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Experts lacking faith in the sovereign keep nudging its score downwards, suggesting the rating agencies are too confident in their risk assessment.

China’s inability to gain traction in Euromoney’s Country Risk Survey is underlined by its score falling since September from 60.33 (out of 100) to 59.79 in recent days.

It’s a small slip, granted, but one that leaves the world’s most populous nation ranking 38th on ECR’s global risk table, almost five points worse off since 2010, as confidence in the Brics more generally has waned.

That’s the difference between China gaining tier-two status, or remaining confined to tier three in the survey.

Each of the 186 sovereigns is divided among five categories symbolizing differing grades of risk. Tier two is normally identified with A- to AA rated sovereigns.

That China is already rated in accordance with tier two (A+ by Fitch, Aa3 by Moody’s and AA- by S&P) signifies that ECR’s experts – a 43-strong panel where China is concerned – are more conscious of its underlying risks than the rating agencies.

Much of their fear revolves around China’s growth sustainability, with liquidity being squeezed. Premier Li Keqiang has talked lately of “problems surfacing” and “downward pressure on the economy”, but retained the 7.5% real GDP growth target for 2014 in his address to the National People’s Congress while outlining a 2.1% fiscal deficit.

That path is unsustainable without debt risk increasing, but while encouraging consumption the government has kept faith in an investment-led model of infrastructure and property building, risking over-capacity without appropriate mitigation.

Kenneth Hung, head of the CEIC China database, argues: “The case for economic reform in China is compelling.

“If the Rmb4 trillion stimulus package had never been rolled out, perhaps the Chinese economy could have continued its economic cycle from 2001-2002, and built up its own self-adjusting recovery mechanism instead of [relying on] the investment-led growth model.”

Shadow banking

A potential corporate default, China’s first, is generating concern and highlighting the lack of transparency.

Almost all of ECR’s five economic risk indicators were marked down last year, led by bank stability now scoring just 5.4 out of 10 – highlighting the risks of shadow banking, which the government is trying to ameliorate. Transparency, at the heart of the problem, was downgraded to just 3.4; corruption, scoring 3.8, remains just as worrisome despite a clampdown.

BBC correspondent Robert Peston recently cast a beady eye over the effects of all this, noting the growth of China’s banking sector from $10 trillion in 2008 to around $25 trillion today, with the increase equivalent to the entire US system.

Maritza Cabezas, senior economist at ABN Amro, thinks the authorities are determined to rein in public debt and the risks of shadow banking, but “progress will be slow as the government tries to rebalance the economy”.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.