China’s political risk is on par with its overall rating. Political risk relates to the potential for further strain in geopolitical relations, including the US-China relationship and other countries, that adds to trade and economic growth risks.
Country risk in China is low. China has an investment grade sovereign credit rating from private ratings agencies and an OECD country credit grade of 2. This indicates a relatively low likelihood that it will be unable or unwilling to meet its external debt obligations. That said, individual private and sub-sovereign debtors can and do default from time to time. The elevated economy-wide debt burden, particularly among state-owned enterprises and corporates, remains a prominent risk to China’s country ratings.
The World Bank’s ease of doing business gauge—which attempts to measure regulation and red tape relevant to a domestic small to medium-sized firm—ranks China’s business climate 31st out of 190 economies, up 47 places since 2016. China has made significant progress in dealing with construction permits and protecting minority investors.
The risk of expropriation is elevated relative to China’s overall rating. According to the US investment climate statements, Chinese law prohibits expropriation of foreign invested firms, except under “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment. The US is not aware of any cases of expropriation of US investments since 1979.
The World Bank ranks China in the second bottom quartile for most dimensions of governance. This reflects in part weak rights for participation in the political process, uneven application of the rule of law and corruption. China scores in the lowest quartile for voice and accountability. Government effectiveness is ranked near the top quartile, in part reflecting the effectiveness of government policies in helping to contain leverage and credit risks while also preserving GDP growth, and economic and financial stability.