Fitch Ratings on March 20 affirmed China's long-term foreign-currency issuer default rating, citing the country's strong external finances, stable growth and low inflation, but warned that mounting trade tensions with the U.S. could dampen Fitch's baseline outlook for China.
Fitch said tighter financial regulations implemented since early 2017 have led to a "notable" slowdown in China's credit growth. Official data shows aggregate financing growth falling to an annual 11.2% in February 2018 from 12.8% in the year-ago period.
But the rating agency cautioned that "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 forecasts real GDP growth to slow to 6.5% in 2018 and 6.1% in 2019, from 6.9% in 2017, due to a tighter credit environment and a cooling property sector, assuming no additional policy stimulus.
China set its 2018 annual growth target at around 6.5%, which is what Fitch predicts too. But the rating agency expects a "sequential deceleration" until the end of this decade will lower China's average growth rate to below government targets linked to Beijing's long-term goals to double 2010 GDP and achieve a "moderately prosperous society" by 2021.
U.S. President Donald Trump's administration is reportedly preparing to announce up to $60 billion in new tariffs on imports from China by March 23, potentially targeting intellectual property, technology and telecommunications. American soybeans will be targeted as part of Chinese retaliation to Trump's potential tariffs on imports from Beijing, an editor of Chinese state-backed English language newspaper Global Times said.
Slower growth and/or strained trade ties with the U.S. "could tempt the authorities to fall back on the old growth engines of credit-fueled investment and policy stimulus, and postpone commitments to stabilize leverage ratios," Fitch warned.
Fitch affirmed the long-term foreign-currency issuer default rating at A+ with a stable outlook, but said relatively lower income levels and weaker governance standards compared to peers weigh on China's ratings.
Meanwhile, there is uncertainty on the policy impact of President Xi Jinping's power consolidation of presidential term limits. "In the short run, more centralized decision making could speed up difficult supply-side and service-sector reforms. However, faster and more centralized decision making also raises the risk of policy mistakes as China's economy grows in size and complexity," the rating agency said.