S&P affirms China ratings at 'AA-/A-1+', but outlook remains Negative

 HONG KONG – Ratings agency Standard & Poors says China's reforms to its fiscal and monetary policies, coupled with its anti-corruption campaign, should help support its sovereign creditworthiness. S&P today affirmed its 'AA-/A-1+' sovereign credit ratings on China, but said reliance on credit-fuelled growth poses the downside risk of a hard landing.

 “The negative rating outlook reflects our view of gradually increasing economic and financial risks to the Government's creditworthiness, which could result in a downgrade this year or next.” S&P said.

The agency said China continues to rely on credit growth and public investment to sustain high economic growth.

“Nevertheless, growth of corporate leverage appears to have moderated over 2016 and the authorities have increased policy emphasis on reducing corporate leverage.

“The Government also appears to be more open to accepting a further slowdown in economic growth.

“These changes have the potential to lower credit growth in the near future and reduce the related vulnerabilities to the sovereign ratings.

“We project that China's economic growth over the next three years will remain at or above 5.5% annually (but) given the uncertain external economic environment, supporting this growth could require the Government to maintain heavy public investment.

“In this scenario, Government and corporate leverage ratios would continue to deteriorate and the investment rate could remain well above what we believe to be sustainable levels.

“n our opinion, such trends could weaken the Chinese economy's resilience to shocks, limit the government's policy options, and increase the likelihood of a sharper decline in the trend growth rate.”

S&P said a downgrade could ensue if it sees a higher likelihood that China will seek to stabilise growth at or above 6.5% by allowing credit to increase significantly faster than nominal GDP growth, such that the investment-to-GDP ratio remains well above 40% through public investment. www.standardandpoors.com (ATI).