S&P lowers China ratings to 'A+/A-1', says outlook stable
HONG KONG - S&P Global Ratings today lowered its long-term sovereign credit ratings on China to 'A+' from 'AA-' and the short-term rating to 'A-1' from
'A-1+', but said the outlook on the long-term rating is stable. S&P also revised its transfer and convertibility risk assessment on China to 'A+' from 'AA-'.
The agency said the downgrade reflects its assessment that a prolonged period of strong credit growth has increased China's economic and financial risks.
“Since 2009, claims by depository institutions on the resident non-government sector have increased rapidly,” it said. “The increases have often been above the rate of income growth.
“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.”
S&P said recent intensification of Government efforts to rein in corporate leverage could stabilise the trend of financial risk 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,” it said.
“The stable outlook reflects our view that China will maintain robust economic performance over the next three to four years.
“We expect per capita real GDP growth to stay above 4% annually, even as public investment growth slows further.
“We also expect 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.
“We may raise our ratings on China if credit growth slows significantly and is sustained well below the current rates while maintaining real GDP growth at healthy levels.
“A downgrade could ensue if we see a higher likelihood that China will ease its efforts to stem growing financial risk and allow credit growth to accelerate to support economic growth.”
S&P said its ratings on China reflect its view of the Government's reform agenda, growth prospects, and strong external metrics. On the other hand, it weighed these strengths against certain credit factors that were weaker than what is typical for similarly-rated peers.
“For example, said S&P, “China has lower average income, less transparency, and a more restricted flow of information.”
The agency is projecting China's per capita GDP to rise to above US$10,000 by 2019, from a projected US$8,300 for 2017.
S&P said it viewed the Government's anti-corruption campaign as a significant move to improve governance at State agencies, local governments, and State-owned enterprises (SOEs).
“Over time, this could translate into greater confidence in the rule of law, improvements in the private-sector business environment, more efficient resource allocation, and a stronger social contract,” it said.
“The Government continues to make significant reforms to its budgetary framework and the financial sector. These changes could yield long-term benefits for China's economic development.”
S&P said it expected China's economic growth to remain strong at close to 5.8% or more annually through at least 2020, corresponding to per capita real GDP growth above 5.4% each year. “We also expect credit growth in China to outpace that of nominal GDP over much of this period.” www.standardandpoors.com (ATI).