S&P Keeps China at A+ as Fiscal Support Sustains Growth but Raises Long-Term Questions

S&P’s decision indicates that China retains a strong capacity to meet its financial obligations despite slower structural growth and an increasingly difficult external environment. The agency highlighted progress in strengthening domestic supply chains, technological capabilities and advanced manufacturing, which has helped the economy absorb trade tensions with the United States and wider geopolitical disruptions. China’s economy grew 4.7 percent year on year in the first half of 2026, remaining within reach of the government’s full-year target of 4.5 to 5 percent. High-technology industries continued to outperform, with investment in high-tech sectors increasing 4.6 percent and output of products such as lithium-ion batteries, industrial robots and 3D-printing equipment recording rapid growth.

The overall economy is nevertheless highly uneven. Retail sales of consumer goods increased only 1.3 percent during the first half, while fixed-asset investment fell 5.7 percent and real-estate development investment declined 18 percent. The weakness became more visible in July, when retail sales grew just 0.6 percent from a year earlier and property investment for the first seven months fell 19.2 percent. By contrast, exports increased 14 percent over the same seven-month period. These figures explain why S&P views manufacturing capacity and supply-chain competitiveness as important credit strengths while simultaneously identifying subdued consumption and the property downturn as major constraints. China can still generate growth, but the expansion remains disproportionately dependent on industrial production, exports and government-supported investment.

Fiscal policy is consequently becoming the bridge between China’s strong productive capacity and its weak private-sector demand. Beijing has set its official 2026 deficit-to-GDP ratio at approximately 4 percent, with the government deficit reaching 5.89 trillion yuan, an increase of 230 billion yuan from 2025. General public budget expenditure is projected to reach 30 trillion yuan for the first time. This support can stabilize infrastructure spending, fund technological development and cushion local governments affected by declining land-sale revenue. It can also prevent the property downturn from producing a sharper economic contraction. However, continued reliance on fiscal expansion transfers economic risks onto public-sector accounts, particularly when investments generate limited returns or when central authorities must absorb liabilities originating from local governments and state-linked entities.

Price conditions present another warning. Consumer inflation remained positive in the first seven months of 2026, but weak household demand and soft labor-market conditions continue to create a risk that deflationary pressure could return. Fitch has noted that China’s GDP deflator turned positive in the second quarter after an extended period of decline, but cautioned that the improvement may not be durable without a stronger recovery in domestic spending. Deflation would make debt more burdensome in real terms, weaken corporate revenues and discourage households from bringing purchases forward. The IMF has similarly argued that China should maintain fiscal support while shifting more expenditure toward consumption and resolving property-sector problems, rather than relying predominantly on infrastructure and industrial investment.

For financial markets, the stable A+ rating reduces the immediate risk of a sovereign downgrade and supports confidence in central-government and policy-related debt. Yet it should not be interpreted as eliminating concerns about developers, local-government financing vehicles or banks exposed to property-related assets. S&P has indicated that substantially larger and more persistent fiscal stimulus than currently expected could create downward rating pressure, especially if economic growth remains dependent on public support. China’s central credit strength therefore remains considerable, but the next phase will depend on whether fiscal expansion produces a self-sustaining recovery in household demand. If support merely offsets property losses while manufacturing continues to outpace domestic consumption, the economy may maintain growth above 4 percent without fully resolving the imbalances that threaten its longer-term credit profile.