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If stagflation hits, China will be hit the hardest, says S&P Global Ratings

Jennifer by Jennifer
July 21, 2022
in Economy, World
0
If stagflation hits, China will be hit the hardest, says S&P Global Ratings
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China could suffer the most from stagflation if inflation spikes, growth slows and interest rates rise, according to a stress test conducted by S&P Global Ratings on 20,000 companies.

High unemployment and rising prices are characterized by stagflation.

More than 90% of its sample consisted of unrated companies with debt totaling $37 trillion, representing 41% of total global corporate debt. The companies were categorized into four risk tiers: low, moderately low, moderately high, and high.

Terry Chan, senior research fellow at S&P Global Ratings, said China’s vulnerabilities stem from its historical past, with high growth making Chinese companies highly leveraged, or highly indebted.

Due to China’s slowing growth, they’re taking a double hit: slowing growth and price pressures from overseas, since some of the components are imported… Which is why they seem to perform the worst in the stress test. chan said

A “balancing act” has been attempted by the government, he said.

“They’re trying to rebalance the economy [so they can] strengthen some of the state-owned corporations and maybe reduce the size of the private sector,” he said.

Policies based on zero-covid

Business and consumer sentiment in China are affected by Covid lockdowns, Chan said. In contrast to the rest of the world, the country has implemented a strict zero-Covid policy. Even though it showed signs of easing such measures in May, regions with new spikes in cases were placed on alert earlier this month, facing the prospect of more lockdowns.

China’s crackdown on the real estate market in 2021, intended to curb speculation, is another factor at play, Chan said. Also, Xi has cracked down on technology companies, he added.

Chan also drew a parallel between current economic challenges and the inflation problem the U.S. faced in the 1970s. As a result, a recession may be inevitable, and “break the back” of persistent inflation.

Tags: ChinaGlobal RatingInflationzero-covid Policie
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