China will be hardest hit if stagflation hits, says S&P Global

China will fare worst when rising inflation, slowing growth and rising interest rates lead to stagflation, according to the results of a stress test of 20,000 companies conducted by rating agency S&P Global Ratings.

Stagnation is characterized by rising prices and slowing economic growth or high unemployment.

The company said over 90% of its sample consisted of unrated companies with a total of $37 trillion in debt, or 41% of total global corporate debt. The companies were classified into four risk levels: low, moderately low, moderately high and high.

Speaking to CNBC’s Squawk Box Asia, Terry Chan, senior research fellow at S&P Global Ratings, said the reasons for China’s vulnerability are historical, a legacy of years of high growth that left Chinese companies heavily leveraged or heavily indebted be.

“Now that China’s growth is slowing, they are both taking a double hit from slowing growth and pricing pressures from overseas because some of the components are imported… And that’s why they seem to be the worst performers in the stress test,” Chan said.

He added that the government was trying to find a “balancing act”.

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

Zero Covid Policy

Rush hour traffic at an intersection in Beijing, China, June 16, 2022. China’s capital had been working to control a new Covid cluster after dozens of people linked to a local nightclub tested positive for the virus. The country, unlike the rest of the world, has a strict zero-Covid policy to contain outbreaks.

Kevin Frayer | News from Getty Images | Getty Images

There are other factors at play, such as China’s crackdown on the housing market in 2021 to curb speculation in the sector, Chan said. Xi also launched a crackdown on tech companies, he added.

More broadly, Chan drew a parallel between the current economic challenges and the inflation problem faced by the US in the 1970s. He added that a recession could become inevitable and could be a way to break the back of ongoing inflation. China will be hardest hit if stagflation hits, says S&P Global

Joshua Buckhalter

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