S&P pours cold water on Beijing’s upbeat economic narrative
Downgrade, from AA- to A+, is the second by an international rating agency this year
S&P Global Ratings on Thursday cut China’s sovereign credit for the first time since 1999, pouring cold water on Beijing’s optimistic reading of its economic prospects.
The US rating agency said the downgrade, from AA- to A+, reflected increased economic and financial risks in China after “a prolonged period of strong credit growth”.
The downgrade was the second by an international rating agency this year, after Moody’s in May cut China’s rating for the first time since 1989. A day after that move, Moody’s also downgraded Hong Kong’s rating.
Also on Thursday, S&P lowered the ratings of three foreign banks that operate in China, namely HSBC China, Hang Seng China and DBS Bank China.
The downgrades of China’s rating by two agencies in four months suggest Beijing is failing to convince the world of its economic sustainability, despite the rosy economic picture it likes to paint.
The latest downgrade came despite Beijing reporting “stronger-than-expected” growth of 6.9 per cent in the first half of the year, improving the profitability of its indebted industrial sector, engineering a noticeable appreciation in the value of the yuan against the US dollar, and stemming the outflow of capital funds.
Chinese Premier Li Keqiang last week told the heads of six multilateral agencies, including the World Bank and International Monetary Fund, that China’s economy had improved and that its debt situation was “under control”.
S&P said, however, that China’s credit growth in the next two to three years “will remain at levels that will increase financial risks gradually”.
Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong, said and it “made sense” for rating agencies to flag risks as they saw them.
The Chinese government’s tolerance of “a continued steady increase in leverage in the coming year – on top of an already high level of leverage – is worrying many people”, he said.
However, he added that China would not be facing a systemic financial crisis any time soon.
A sovereign rating downgrade could make it more costly for Chinese companies and the government to borrow money on the international market, and more difficult for Beijing to attract investors to its financial markets.
When Moody’s downgraded China in May, the finance ministry issued a statement saying the agency had “overestimated China’s economic difficulties and underestimated the capabilities of the Chinese government”. It has yet to respond to Thursday’s downgrade.
Raymond Yeung, chief Greater China economist with ANZ Bank in Hong Kong, said S&P changed its outlook for China last year, which hinted at a future downgrade. Yesterday’s move, therefore, was “well within market expectations and its market impact is limited so far”, he said.
The S&P statement was published a day after the US Federal Reserve set out a timetable to steadily increase interest rates and sell off bonds to reduce its balance sheet, a development that is expected to make it more urgent for Beijing to tackle its domestic debt and financial problems.
Outstanding aggregated financing rose by 13.1 per cent at the end of August, according to the People’s Bank of China, despite its claims of adopting a prudent and neutral monetary policy to facilitate financial deleveraging and structural adjustment.
Meanwhile, Chinese researchers said S&P was exaggerating China’s debt risks.
Zhao Xijun, deputy dean of the school of finance at Renmin University of China, said the downgrade was “neither objective, nor accurate or responsible”.
“The key issues regarding China’s credit growth and debt are destination, return and repayment ability,” he said. “China’s investment funds have gone to much needed areas and the likelihood of default is very low.”
Yu Miaojie, deputy head of the National School of Development at Peking University, said China had enough reserves to cover its external liabilities while its domestic debt was not in the danger zone in the context of its economic growth.
“S&P may have over emphasised one or two specific indicators and read a bit too much into them,” he said.