S&P slaps China with a downgrade

Published Sep 22, 2017

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INTERNATIONAL - S&P Global Ratings downgraded China’s long-term sovereign credit rating yesterday, less than a month ahead of one of the country’s most sensitive political gatherings, citing increasing risks from its rapid build-up of debt.

S&P’s one-notch downgrade to A+ from AA- comes as Beijing grapples with the challenges of containing financial risks stemming from years of credit-fuelled stimulus needed to meet ambitious government economic growth targets.

“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said, adding that the ratings outlook was stable. S&P had said in June that there was a “real” chance of a downgrade and that a decision would be made based on whether China is able to move away from a credit-driven growth strategy. The demotion follows a similar move by Moody’s Investors Service in May.

While S&P’s move put its China ratings on a par with those of Moody’s and Fitch, the timing raised eyebrows just weeks ahead of a twice-a-decade Communist Party Congress, which will see a key leadership reshuffle and the setting of policy priorities for the next five years.

“The downgrade is a timely reminder for the authorities that China needs to bite the bullet on some of the more painful reforms that have been left to last, namely corporate deleveraging and restructuring of state-owned companies,” said Rob Subbaraman, an economist at Nomura in Singapore.

“The focus needs to shift from quantity to quality of growth. I hope that later this year China lowers its GDP growth target to 6 to 6.5percent, or not have one at all. That would be a positive sign.”

The International Monetary Fund warned earlier this year that China’s credit growth was on a “dangerous trajectory” and called for “decisive action.”, while the Bank for International Settlements said last September that excessive credit growth was signalling a banking crisis in the next three years.

While worries about China’s sustained strong credit growth are increasing in some quarters, first-half economic growth of 6.9percent beat expectations and some analysts said the downgrade would have little impact on financial markets.

“The decision was a catch-up with the other two credit agencies, instead of an initiative. “Its impact on financial markets would be very limited,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

China’s stock markets were already closed yesterday when the downgrade was published, and there was little reaction in the yuan. 

- REUTERS 

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