Caixin
Sep 21, 2017 08:25 PM
ECONOMY

S&P Cuts China’s Sovereign Credit Ratings

(Beijing) — S&P Global Ratings on Thursday became the last of the three major international credit ratings companies to downgrade China’s sovereign debt, citing concerns over the growing economic and financial risks facing the country from a “prolonged” borrowing binge.

S&P cut the long-term sovereign credit rating on China by one notch to A+ from AA-, the fifth-highest level, and changed the outlook to stable from negative, it said in a statement. China’s ranking is now the same as that of countries such as Israel, Saudi Arabia and the Czech Republic. It lowered the country’s short-term rating one notch to A-1 from A-1+.

“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” the statement said.

The liabilities of the nongovernment sector since 2009 in the depths of the global financial crisis, have often increased at a rate faster than income growth and although that has contributed to strong real GDP growth and higher asset prices, S&P said this had also “diminished financial stability to some extent.”

S&P’s decision followed a Moody’s Investors’ Service announcement in May of a downgrade of China’s sovereign credit by one notch, also to its fifth-highest level. Fitch Ratings lowered the country’s local currency rating to A+ in 2013.

Sovereign ratings reflect a country’s creditworthiness and a cut can raise the cost of borrowing for the government and companies both at home and overseas.

S&P said it could cut China’s ratings again “if we see a higher likelihood that China will ease its efforts to stem growing financial risk and allow credit growth to accelerate to support economic growth.”

This trend would weaken the economy’s resilience to shocks, limit the government’s policy options and increase the likelihood of a sharper decline in the country’s growth rate.

On the other hand, S&P said it may raise the rating “if credit growth slows significantly and is sustained well below the current rates while maintaining real GDP growth at healthy levels.”

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,” S&P said in its statement.

While noting strengths including the government’s reform agenda, the economy’s growth prospects, sound foreign debt exposure and balance of payments surplus, the agency said other factors including “lower average income, less transparency, and a more restricted flow of information” were “weaker than what is typical for similarly rated peers.”

The Chinese leadership has been increasingly concerned about the risks posed by the scale of the country’s liabilities, especially in the corporate sector and local governments. President Xi Jinping stated in late 2015 that deleveraging should be a top priority in economic work. At a meeting in July of the National Financial Work Conference, which is held every five years to map out financial reform, Xi said that the government must press ahead with deleveraging the economy and guard against systemic financial risks.

The combined debts of banks and other deposit-taking institutions fell to 71.2% of gross domestic product (GDP) by the end of March from 72.4% at the end of last year, when measured by the liability side of their balance sheets, according to estimates from an arm of state-backed think tank the Chinese Academy of Social Sciences, which the academy attributes to the government’s campaign to force the financial sector to deleverage to curb its credit risks,

However, during the same period, debt racked up by Chinese companies, households and the government rose to 237.5% of GDP from 234.2%.

Beijing’s reforms to its budgetary framework and the financial sector and its signals that it will allow inefficient, money-losing state-owned enterprises to fall could yield long-term benefits, but S&P warned that off-balance-sheet borrowing by local authorities to fund public investment could still require government resources to repay in the future.

The agency said it estimated China’s overall debt would continue to grow faster than nominal GDP for most of the period through 2020, and that general government debt, which includes nearly 25 trillion ($3.9 trillion) of borrowing by local government financing vehicles, will rise by 2.8%-4.9% of GDP each year from 2017 to 2020.

Contact reporter Fran Wang (fangwang@caixin.com)

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