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

Andrew Cummings
September 21, 2017

Global credit rating agency Standard and Poor's (S&P) downgraded China's sovereign credit ratings one step with stable outlook on Thursday.

Helena Huang, China economist at ICBC Standard Bank, said: "Without any near term credit risks amid Beijing's recent regulatory tightening and de-leveraging efforts, the key uncertainty still rests in the longer term on Beijing's capability to resolve its debt conundrum". The demotion follows a similar move by Moody's Investors Service in May.

The downgrade from S&P brings its rating in line with assessments from Fitch and Moody's, which lowered its rating for the country in May.

While the downgrade means China still retains an "investment-grade" rating, the size of China's debt remains an important concern for both Chinese policymakers and other economies around the world. The IMF forecasts 6.7 percent economic growth for this year, and 6.4 percent in 2018.

On the upside, such credit growth was a factor behind strong real GDP growth and loftier asset prices, but at the price - to some extent - of "diminished financial stability".

S&P said it "may raise" its rating on China if debt growth slows significantly while the country maintains economic growth at "healthy levels".

The IMF said in August it expected China's total non-financial sector debt to rise to nearly 300 percent by 2022, up from 242 percent a year ago. 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.

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. "We also expect credit growth in China to outpace that of nominal GDP over much of this period".

Many outsiders are skeptical that China will act to rein in credit growth at the expense of economic growth.

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