S&P Global Rating has downgraded China’s long-term sovereign credit ratings from A+ to AA-. A prolonged period of credit growth sparked the move. This has put the Asian country at a greater level of economic and financial risk.
Despite the cut, S&P believes that China’s long-term rating is largely stable.
The increase in credit growth in China has contributed to a rise in GDP and asset value. However, the growth also puts the economy at a greater financial risk.
This is the second downgrade by a ratings agency for China this year. They already received a cut from Fitch and Moody’s.
Communist Party Congress
The downgrade comes just weeks in advance of the Communist Party’s Congress. This is a major event in the lifecycle of Chinese political life. The Congress only occurs about twice-a-decade. Political elite rubberstamps political changes at the gathering. Participants elect new members to the politburo and several other committees.
The timing of the downgrade could be uncomfortable for the Chinese leadership. Investors are becoming concerned that China is unable to properly manage their debt. This is despite considerable economic growth. Last month, the IMF increased China’s average annual growth rate for 2020.
Growth v’s Debt
Stephen Gallo, European head of FX Strategy at BMO Financial Group told CNBC about China’s problems. “To be sure, the move by S&P this morning merely brings the ratings agency into line with where Moody’s and Fitch already were (5 notches below triple-A). Therefore, the direct economic/market impact of today’s decision by S&P is low.” He added, “If anything, the decision by S&P highlights the degree to which China will aim to keep leverage growth within the domestic economy low-to-moderate as opposed to high.”
Carlos Casanova, economist for Asia Pacific Region in Hong Kong said:
“S&P’s decision also highlights our concerns surrounding China’s corporate debt levels. Additional liquidity has led to the formation of imbalances, including a housing bubble and mounting corporate debt. The surge in liquidity can be traced back to 2008, when the Chinese authorities embarked on a massive stimulus package, estimated to be RMB 4 trillion (USD 650 billion), in a wide-ranging effort to offset adverse global economic conditions and boost domestic demand. Corporate debt warrants the most attention, as it currently stands at approximately 200 percent of GDP, a very high level by international standards.”
China’s economic growth this year has exceeded the expectations of many economists. An increase in heavy industry and exports have driven growth. However, analysts believe that the country’s debt problems could overshadow the medium-term impact of economic stimulus. Chinese leaders have pledged to take action. Government proposals include an increased regulation and an end to practices such as shadow banking.
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