Chinese Banks Are Latest to Dispute S&P Ratings Cut

Chinese banks came to their own defense after becoming collateral damage in last week’s Standard & Poor’s Global Ratings downgrade of the country’s sovereign debt.

After cutting the credit ratings on China by one notch to A+ on concern of rising economic and financial risks after years of credit-fueled growth, S&P moved to lower its ratings on Chinese lenders, as well as the China units of some foreign lenders. The cut was to reflect the banks’ default risks if the government fails to make payments on its sovereign debt, the agency said.

While the follow-on downgrades were in line with the industry practice that caps corporate ratings below the sovereign, the cut will effectively increase the lending costs for those lenders — more so if they turn to overseas investors who usually price debts with reference to credit ratings.

The China Banking Association called S&P’s decision unfair and said the ratings agency “can’t see the forest for the trees.” It also said S&P overlooked China’s recent improvement of loan quality and the government’s resolve to cut excess leverages.

“S&P only focused on the relatively high leverage level in China, but overlooked the controllable risks in a different financing structure,” Pan Guangwei, executive vice president of the industry body, told reporters on Monday, according to a transcript posted on its website.

Pan also said the quality of credit assets at banks is generally stable. The outstanding value of bad loans in the banking system stood at 1.64 trillion yuan ($247.3 billion) as of the end of June, and the ratio of nonperforming loans to total debts at 1.74%, unchanged for three consecutive quarters, according to figures released by China Banking Regulation Commission, which oversees the association.

China's debts are sufficiently backed by high-quality assets and a stable cash flow, Pan said.

“Be it state-owned enterprises or local governments, they both have a number of profitable or realizable assets, including highways and urban underground integrated corridors, … and they have strong debt solvency and multiple ways and means of deleveraging,” he said.

“S&P paid too much attention to the historical issue of China's economy but failed to observe through the policies the confidence, determination and efficiency of China to address the debt problem and leverage issues,” he added. “Nor did S&P notice the resulting positive effects and the improvements and upgrades in the overall credit environment.”

S&P was the last of the three major credit-ratings companies to lower China’s debt rating. It said in its news release announcing the downgrade last week that despite the recent intensification of government efforts to rein in corporate leverage, “we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually.”

China has stepped up efforts to get rid of systemic excesses and to minimize the potential contagion of those risks.

The crackdown on shadow banking, where risks are still most worrying among policymakers and analysts, has led to a steep decline in the rate of expansion in M2, China’s broadest measurement of money supply, due to a slower growth of money held by the financial sector. The M2 rose by 8.9% in August from a year earlier, the weakest increase on record and down from 9.2% in July and 11.4% a year earlier. The People’s Bank of China has described the slowdown as a “new normal,” reflecting its progress in cutting financial leverage.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)