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According to rating agencies, the escalation of its trade dispute with the United States could not only hurt the Chinese economy, but also damage its credit reputation.
China's credit remains strong despite a weakening economy and a high-stakes tariff battle with the United States. However, if the stalemate persists, the damage may become more significant and begin to have more profound consequences.
"The tariff war is negative for China, especially at a time when its policymakers are struggling with problems of increasing debt and increasing the debt of its economy," they said. said analysts of the DBRS rating agency. "The economic impact of rising tariffs on China would be greater than solely through its trade with the United States"
An accompanying statement indicated that the impact of greater intervention by the central bank could have an impact on [China’s] the ratio of the public debt and the rating of China ".
Credit rating reductions often result in higher interest rates for a country's bonds. China's debt currently stands at US $ 5.3 trillion, or about 43 percent of its GDP.
DBRS, the world's fourth-largest rating agency, gave China the "A" rating, making it its third highest ranking. However, it has recently changed the outlook into a negative outlook as pricing issues accumulate.
"China remains a middle-income country that generally lacks the historical openness, institutional credibility and transparency of major global financial centers," the firm said in a previous note.
Negotiators on both sides are optimistic that an agreement can be found, even though markets have been focused on the more immediate impacts of existing tariffs and future threats.
This month, the United States raised its tariffs from 10% to 25% against 200 billion dollars of Chinese goods. China responded by raising its tariff rate from 10% to 20% -25% on $ 60 billion of US imports. The United States is seeking a number of concessions, focusing in particular on the opening of Chinese markets and the fight against intellectual property theft and technology transfer.
If the US did not get what it was looking for, President Donald Trump threatened to spoil tariffs on $ 300 billion of additional imports from China. The United States had a trade deficit of $ 419.2 billion with China in 2018, with imports of $ 539.5 billion and exports of only $ 120.3 billion. In the first three months of 2019, the deficit did not exceed $ 80 billion.
Other rating agencies have noted the danger of further intensification of relations.
"A brutal break in trade negotiations, if it occurs, would introduce considerable political uncertainty, increase risk aversion and lead to a sharp price revision of risky assets," said a note in a statement. Moody analyst & Madhavi Bokil. "In China, the rise in US tariffs will have a significant negative effect on exports in a context of economic slowdown already."
Fitch said China could compensate for additional tariffs through increased monetary easing, but said it expects GDP to fall to 6.1 percent this year, compared with 6.6 percent % in 2018.
If the US expands its sanctions, it could lose half a point to the growth, said the agency.
"But if trade tensions eventually lead to widespread US tariffs on all Chinese products, the potential impact on ratings could be greater, as the authorities may be tempted to abandon their policies. Restricted easing and adopting credit stimulus that exacerbate the country, already significant financial vulnerabilities, "said Brian Coulton, Fitch economist.
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