S&P downgrades China outlook – says sovereign credit risks are increasing

HONG KONG – Despite saying it believes China’s reform agenda is on track following recent key legislative meetings, ratings agency Standard and Poor’s has downgraded its ratings outlook on China to negative from stable saying that economic rebalancing is likely to proceed more slowly than had been expected. Hong Kong’s ratings were also downgraded.

S&P said it revised its outlook to reflect its expectation that economic and financial risks to the Chinese Government's creditworthiness are gradually increasing.

“This follows from our belief that, over the next five years, China will show modest progress in economic rebalancing and credit growth deceleration,” S&P said.

“We project that China's economic growth over the next three years will remain at or above 6% annually. However, Government and corporate leverage ratios are likely to deteriorate, in our view, and the investment rate could be well above what we believe to be sustainable levels of 30%-35% of GDP and among the highest ratios of rated sovereigns.

“In our opinion, these expected 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 trend growth rate.

‘The ratings on China reflect our view of the Government's reform agenda as reaffirmed by the recently-concluded National People's Congress as well as China’s growth prospects and strong external metrics.

“We weigh these strengths against certain credit factors that are weaker than what is typical for similarly-rated peers. For example, China has lower average income, less transparency, and a more restricted flow of information.”

S&P said the Chinese Government continues to make significant reforms to its budgetary framework and to the financial sector, and these changes could yield long-term benefits for China's economic development.

“The Government also appears to be signalling that it will allow SOEs with lesser policy importance to exit the market either through merger, closure, or default in order to allocate resources more efficiently.

“However, our negative outlook is partly motivated by our opinion that the pace and depth of SOE reform may be insufficient to attenuate the risks of credit-fuelled growth.” www.standardandpoors.com (ATI).