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China: Structural Issues Overshadow The Cyclical Upturn

While 2022 was a year where China missed its growth targets by a wide margin (2.2% vs. 5.5% target), the reopening story was expected to be a big positive catalyst for China in 2023. However, following strong GDP growth in the first quarter of 2023, China’s post-pandemic recovery is already losing steam. The People's Bank of China cut its seven-day reverse repo rate by 10 bps earlier this week. Even with a more supportive policy stance, we expect structural headwinds including China’s debt overhang, ageing demographics, and heightened U.S.-China tensions to pose challenges to growth.

This commentary discusses China’s structural growth challenges and the potential credit implications. The IMF expects China’s GDP to grow 4.1% per year between 2023 and 2028, substantially lower than the 10-year average of 7.7% prior to the pandemic (2010-2019). In our view, domestic and external challenges to China's growth outlook pose downside risks to China’s rating and are one of the main factors behind our Negative trend.

Key Highlights
• The reopening of China's economy coupled with expansionary policies resulted in stronger than expected growth in 1Q.

• The recovery is losing steam with structural challenges coming to the fore.

• In the context of high indebtedness, this could have negative implications for financial stability or government finances.

“China’s increasing debt overhang and property sector weakness, coupled with its demographic challenges and rising geopolitical tensions, if sustained, could have negative implications for the country’s economic and fiscal prospects,” says Rohini Malkani, Senior Vice President, Global Sovereign Ratings Group. “This could adversely affect China’s ratings.”