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Escalations in its trade dispute with the U.S. not only could dent China's economy but also impact its credit standing, according to ratings agencies.
China's credit remains strong despite a weakening economy and a high-stakes tariff battle it is engaged in with the U.S. However, should the impasse linger on, the damages could become greater and start having some deeper impacts.
"The tariff war is negative for China especially at a time when its policy makers are battling problems of rising debt and increasing leverage in its economy," analysts at ratings agency DBRS said in a note. "The economic impact on China of rising tariffs would be broader than just via its trade with the U.S."
An accompanying release said the impact of more central bank intervention could impact "the future of [China's] public debt ratio and China's rating."
Reductions in credit ratings often translate to higher interest rates for a country's bonds. China's debt is currently equivalent to $5.3 trillion in U.S. dollars, or about 43% of its GDP.
DBRS, the fourth-largest ratings agency in the world, has China rated "A," which is its third-highest classification. However, it recently changed the outlook to negative as the tariff issues pile up.
"China remains a middle-income country that generally lacks the historic openness, institutional credibility and transparency of the major global financial centers," the firm said in an earlier note.
Negotiators on both sides say they remain optimistic a deal can be reached, though markets have been focused on the more immediate impacts of existing tariffs and threats of ones to come.
The U.S. this month hiked its tariffs to 25% from 10% on $200 billion of Chinese goods. China retaliated by raising its tariff rate from 10% to 20%-25% on $60 billion of U.S. imports. The U.S. is seeking a number of concessions, particularly focused on opening Chinese markets and halting the theft of intellectual property and forced technology transfers.
Should the U.S. not get what it is seeking, President Donald Trump has threatened to slap tariffs on another $300 billion in Chinese imports. The U.S. had a $419.2 billion trade deficit with China in 2018, on $539.5 billion in imports and just $120.3 billion in exports. The deficit through the first three months of 2019 was just shy of $80 billion.
Other ratings agencies have noted the danger to further intensifying relations.
"An abrupt breakdown in trade talks, if that were to occur, will inject considerable policy uncertainty, increase risk aversion and lead to an abrupt repricing of risk assets globally," Moody's analyst Madhavi Bokil said in a note. "In China, increased US tariffs will have a significant negative effect on exports amid an already slowing economy."
Fitch said China could offset the additional tariffs with more monetary easing, but noted it expects GDP to fall to 6.1% this year from 6.6% in 2018.
Should the U.S. extend its sanctions, that could knock off another half-point from the growth figure, the agency said.
"But if trade tensions eventually lead to blanket U.S. tariffs on all Chinese goods, the potential rating impact could be greater, as it may tempt the authorities to abandon their restrained approach to policy easing, and adopt credit stimulus measures that exacerbate the country's already significant financial vulnerabilities," said Brian Coulton, Fitch's economist.