S&P announced yesterday it had lowered the country’s long-term sovereign credit ratings from AA- to A+, putting China in the same category as Japan and Isreal.
The agency said the downgrade reflected a “prolonged period of strong credit growth”, which increased the country’s financial risks.
It added: “Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent”.
The government has a growth target of 6.5% for 2017, but the economy grew at an annual rate of 6.9% in the second quarter of the year.
The International Monetary Fund said in August that China’s growth was on a “dangerous trajectory” and urged the country to increase domestic spending.
S&P said it expects GDP growth to stay above 4% annually and “the stricter implementation of restrictions on sub-national government off-budget borrowing to lead to a declining trend in the fiscal deficits, as measured by changes in general government debt in terms of GDP”.
China is undertaking reforms to its budgetary framework and financial sector to improve its economic and fiscal resilience that could have long-term benefits for China’s economic development, S&P said.
The agency said the implementation of fiscal reforms, to improve transparency, budgetary planning and execution, and sub-national debt management, could also help the government manage slower growth and lower its reliance on revenue from land sales.
Commenting on S&P’s decision, Helena Huang, China economist at ICBC Standard Bank said the downgrade had been widely expected. The downgrade brings S&Ps rating in line with those of Fitch and Moody’s, which lowered the ratings for China in May.
Huang said: “Echoing with Fitch and Moody’s evaluation, the S&P’s downgrade reiterates broad concerns over the expansion of China’s debt accumulation. Though 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.”
