China will be the most affected in the event of stagflation, according to S&P Global

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

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

The company said more than 90% of its sample was made up of unrated companies with $37 trillion in debt, or 41% of total global corporate debt. Companies were classified into four levels of risk: low, moderately low, moderately high and high.

Speaking to CNBC’s “Squawk Box Asia,” Terry Chan, senior researcher at S&P Global Ratings, said the reasons for China’s vulnerability are historic, a legacy of years of strong growth that led Chinese companies to to go into heavy debt or to go into debt.

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

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

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

Zero-Covid Policy

Rush hour traffic at an intersection in Beijing, China June 16, 2022. The Chinese 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 pursued a strict zero-Covid policy to contain outbreaks.

Kevin Frayer | Getty Images News | Getty Images

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

More generally, Chan drew a parallel between today’s economic challenges and the inflation problem that the United States faced in the 1970s. He added that a recession could become inevitable and could be a way to “break the back” of persistent inflation.

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