S&P lowers China's credit rating, citing rising financial risks

Danny Woods
September 22, 2017

Standard & Poor's cuts China's sovereign credit rating, as "a prolonged period of strong credit growth has increased China's economic and financial risks". The demotion follows a similar move by Moody's Investors Service in May.

The action brings the ratings across the three major credit-rating firms in line. In any case, the bulk of China's government debt is bought by state-owned banks and held to maturity, the economist noted.

"The focus needs to shift from quantity to quality of growth".

Beijing has been clamping down on bank lending and property purchases, but those efforts are complicated by the government's determination to meet its full-year growth target of around 6.5 percent. "That would be a positive sign".

The IMF expects China's total non-financial sector debt as a proportion of gross domestic product to rise to nearly 300% by 2022, up from 242% past year.

"We expect China's economic growth to remain strong at close to 5.8 per cent or more annually through at least 2020, corresponding to per capita real GDP growth of above 5.4 per cent each year. The downgrade decision is likely to have limited impact on capital inflows as well".

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The stock markets in China were closed when the announcement of downgrading was made, meaning there was very little reaction from the yuan. "However, we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually", the agency said in a statement.

However, some analysts said the outlook for China's economy improved in recent months, amid the government controls and improving corporate earnings. "While China's credit growth continues to outpace nominal GDP growth, the gap has actually narrowed this year". Total debt has quadrupled since the financial crisis to hit $28tn (£22tn) at the end of past year.

A recent Reuters analysis showed corporate debt is growing faster than previous year, with few companies using stronger profits to reduce debt.

She also warned that the centralised nature of the regime meant China's exact position might not be clear: "One element that models can not capture is the strength of institutions, such as transparency of regulation of the banking sector and central bank independence".

The ratings on China reflect S&P's assessment of the government's reform agenda, growth prospects, and strong external metrics.

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