Standard and Poors have done some modelling of a Chinese hard landing scenario that makes interesting Strayan reading:
The pace and direction of Chinese economic growth, and, relatedly, the price of oil remain two of the key global risks to creditworthiness today, in our view. S&P Global Ratings’ base-case scenario is for China’s GDP growth rate to average around 6% a year and Brent oil prices to range between $45-$50 a barrel over 2017-2020. However, acknowledging the important and systemic role China plays within the global economy, we stress-tested a sample of our rated issuers according to an extreme scenario: a halving of China’s growth rate and a consequent sharp fall in oil prices and other commodities. This hypothetical scenario has allowed us to map out some of the economic and credit sensitivities and vulnerabilities of such a dual shock to the system. This stress scenario is a tail-risk analysis. As such, it is neither part of our base-case nor even our downside view about China. The stress scenario posits a severe fall in investment in China that triggers an economic deceleration, with spillover effects on the world economy, the oil and commodity markets, as well as on broader business confidence. In our scenario, China’s real GDP growth rate declines to an average annual 3.4% and Brent drops to an average of $30 a barrel for 2017-2020. The outcomes of this stress test indicate that, depending on the region and the sector, anything between one-sixth and more than one-half of issuer ratings could face downgrades. To put this into perspective, the actual cumulative downgrade ratios for financials, industrials, and insurance companies globally in recessionary years like 2002 and 2009 were almost 20%. These results are in line with a presumption that the issuers and sectors most exposed to China and commodities, especially those with lower ratings, are more sensitive to the stress scenario. Moreover, our global portfolio of issuer ratings is likely to perform within our expected tolerances if such a scenario plays out.
The assumptions: