S&P Global Ratings downgraded China's long-term sovereign credit rating on Thursday, 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 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 in a statement, adding that the ratings outlook was stable.
S&P had said in June there was a "real" chance of a downgrade and 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 par with those of Moody's and Fitch, the timing raised eyebrows just weeks ahead of a twice-a-decade Communist Party Congress (CPC), 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 percent to 6.5 percent, or not have one at all. That would be a positive sign."
The International Monetary Fund warned 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.
The IMF said in August it expected China's total non-financial sector debt to rise to almost 300 percent by 2022, up from 242 percent last year.
While worries about China's sustained strong credit growth are increasing in some quarters, first-half economic growth of 6.9 percent 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 very limited," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
"For those invested in yuan-denominated bonds, they care more about yuan expectations. The downgrade decision is likely to have limited impact on capital inflows as well."
China's stock markets had closed Thursday before the downgrade, and there was little reaction in the yuan currency.
While risks are rising, S&P said the government's recent efforts to reduce corporate leverage could stabilise conditions in the medium term.
"However, 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.
S&P also lowered China's short-term rating to A-1 from A-1+.
"It is in recognition of the reality that, concerns notwithstanding, the authorities are not planning to rein in credit growth in a forceful way," said Louis Kuijs at Oxford Economics in Hong Kong.
Indeed, Chinese banks kept the taps open in August, handing out 1.09 trillion yuan ($165.40 billion), and the growth of outstanding loans was higher than expected, at 13.2 percent.
MIXED PROGRESS
Analysts say China's campaign to cut financial risks this year has had mixed success, and opinions differ widely on whether Beijing is moving fast enough, or decisively enough, to avert the risk of a debt crisis down the road.
Regulators are making significant inroads in reducing interbank borrowing – perhaps the most pressing risk - and have curbed some riskier types of shadow banking.
But analysts agree more comprehensive structural reforms are needed. Though the pace of credit growth may be easing, new bank lending and total social financing may hit fresh records this year and continue to outstrip economic growth.
A recent Reuters analysis showed corporate debt is growing faster than last year, with few companies using stronger profits to reduce debt.
"China's credit problem is the biggest problem we have ever seen in any country and probably justifies a lower rating," said Claire Dissaux, head of global economics and strategy at Millennium Global Investments in London.
"One element that models cannot capture is the strength of institutions, such as transparency of regulation of the banking sector and central bank independence. All that is an argument to say China's rating might still be too good."
Reuters
Fri Sep 22 2017
The IMF said in August it expected China's total non-financial sector debt to rise to almost 300 percent by 2022, up from 242 percent last year. - FILEpic
Astro AWANI's revamped English news website, AWANI International, launches on Oct 21
Astro AWANI's revamped English platform delivers in-depth global news and expert analysis to keep you informed on key developments.
Israeli strikes kill 33 people in Jabalia refugee camp in Gaza, medics say
Residents of Jabalia said Israeli tanks had reached the heart of the camp after pushing through suburbs and residential districts.
Liam Payne's ex-partner calls for media restraint after 'painful' death
Cheryl Tweedy used her statement to urge the media to remember they had a seven-year-old son, Bear, who could read the reports.
Analysts: Indonesia's strong MoF leadership team to boost investor confidence
Sri Mulyani Indrawati as head of Indonesia's Ministry of Finance is expected to instil confidence among investors.
Biden offers both a carrot and a stick to Israel as his term nears an end
Israel has frequently resisted US advice and has caused political difficulties for the Biden administration.
Putin says BRICS will generate most of global economic growth
Russian President Vladimir Putin will host a summit of the group in the city of Kazan on Oct. 22-24.
ISIS Malaysia's perspective of Budget 2025
An excellent rakyat-centric budget under the overarching principle of a caring and humane economy.
Budget 2025: Record increase in STR, SARA aid initiatives
The government will provide a significant boost to the Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA) initiatives next year.
Budget 2025: EPF contributions to be made mandatory for foreign workers – PM Anwar
The government plans to make it compulsory for all non-citizen workers to contribute to the Employees Provident Fund (EPF).
What policies to expect from Indonesia's new President Prabowo
Prabowo will be open to foreign investment, his aide has said, such as by offering investors management of airports and sea ports.
Budget 2025: Govt allocates RM470 mil to empower women's participation in PMKS
The Women's Leadership Apprenticeship Program will be intensified as an effort to produce more female corporate personalities.
Israel sends more troops into north Gaza, deepens raid
Residents of Jabalia in northern Gaza said Israeli tanks had reached the heart of the camp, using heavy air and ground fire.
Indonesia ramps up security ahead of Prabowo's inauguration
Prabowo Subianto will be sworn in as Indonesia's president on Sunday with Vice President-elect, Gibran Rakabuming Raka, also taking office.
Immediate allocation of RM150 mil for local authorities, DID to tackle flash floods
Datuk Seri Anwar Ibrahim said this allocation is intended to address the recent flash floods that hit the capital and several major towns.
Budget 2025: Sabah, Sarawak to continue receiving among highest allocations - PM
Sabah and Sarawak continues to be prioritised under Budget 2025, with allocations of RM6.7 billion and RM5.9 billion respectively.
NFOF will be operational in November 2024 with funding of RM1 bil
PM Anwar Ibrahim said NFOF will support venture capital fund managers to invest in startup companies with RM300 million set aside for 2025.
Minimum wage to increase to RM1,700 effective Feb 1, 2025
The Progressive Wage Policy would be fully enforced next year with an allocation of RM200 million, benefiting 50,000 workers.
Bursa Malaysia ends higher on Budget 2025 optimism
The benchmark index, which opened 1.85 points higher at 1,643.29, moved between 1,641.71 and 1,649.31 throughout the trading session.
Five important aspects relating to people’s lives in Budget 2025 - PM
The focus is on driving the MADANI Economy, speeding reforms, cutting red tape, raising wages, and tackling the cost of living.
Economic outlook: Govt plans to leverage, expand existing city transit system
The expansion aims to provide a more efficient and reliable public transportation network, reduce congestion, and improve accessibility.