S&P downgrades China, says rising debt is stoking
economic, financial risks
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[September 21, 2017]
By Elias Glenn
(Reuters) - 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-fueled 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 signaling 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.
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A worker welds reinforcement bars at a site of a highway bridge
under construction in Hefei, Anhui province, China September 21,
2017. REUTERS/Stringer
While risks are rising, S&P said the government's recent efforts to reduce
corporate leverage could stabilize 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."
Related graphic http://reut.rs/2jNKb2N
(Additional reporting Kevin Yao in Bejiing, Sujata Rao-Coverley in London, Winni
Zhou and John Ruwitch in Shanghai, and the Bangalore newsroom; Editing by Kim
Coghill and Clarence Fernandez)
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