Life&Culture

S&P cuts China's sovereign credit rating on growing economic, financial risk

S&P cuts China's sovereign credit rating on growing economic, financial risk

The strong growth of the Chinese economy, driven by a huge build-up of debt, has increased "economic and financial risks", S&P said.

The country faced a similar downgrade in May, when Moody's took the rating down by one notch to A1, citing rising debt and slow growth as factors triggering the action.

The Chinese yuan was weaker against the USA dollar, but the decision had little market impact; the iShares China Large-Cap exchange-traded fund (FXI) was up 0.6% in pre-market trading, while the Guggenheim China Technology ETF (CQQQ) moved fractionally lower overnight.

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.

Today's downgrade was widely anticipated after rival agency Moody's cut its China rating in May.

Beijing has been clamping down on bank lending and property purchases, but those efforts are complicated by the government's determination to meet its full-year growth target of around 6.5 percent.

Influential economists and agencies have been queuing up in recent months to warn the rise in debt is unsustainable, with the International Monetary Fund and the Bank for International Settlements among the most prominent voices.

China's stock markets had closed Thursday before the downgrade, and there was little reaction in the yuan currency.

Remarking the Chinese government's recent strengthening attempts to control over corporate leverage, S&P said these efforts could stabilize the trend of financial risk in the medium term.

Despite government measures, S&P foresee the credit growth in the next two to three years to remain at levels that will lift financial risks gradually.

S&P also lowered China's short-term rating to A-1 from A-1+.

"This won't be news to anyone who has kept half an eye on China over recent years and shouldn't change anyone's thinking", said Mark Williams, chief China economist at Capital Economics.

The ratings on China reflect S&P's assessment of the government's reform agenda, growth prospects, and strong external metrics.


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