China’s credit rating has been downgraded by Standard & Poor’s amid fears rising debts are adding to economic and financial risks.
The agency lowered China’s sovereign rating by one notch to A+ from AA-, putting it in the same category as countries such as the US and Austria. This is the second downgrade from a major ratings agency for Beijing this year and comes at an awkward time before next month’s Communist party congress.
The Chinese government has been expanding the economy as it pushes to double its size between 2010 and 2020, and has allowed non-financial sector debt to rise rapidly. Total debt has quadrupled since the financial crisis to hit $28tn (£22tn) at the end of last year.
S&P pointed to the “prolonged period of strong credit growth” raising the prospect of economic and financial risks to the country. “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,” it said.
The Chinese government has moved to curb rising levels of debt among domestic companies, restricting firms from investing in foreign media and sport industriesafter a buying spree around the world.
Chinese firms and wealthy business tycoons have taken control of assets including Legendary Entertainment, the US film producer behind Jurassic World and Warcraft, buildings such as the Cheesegrater in London, and English football clubs including Southampton and Aston Villa.
S&P said the recent government efforts to rein in borrowing by companies could help mitigate financial risks, although it still expects that Chinese corporate debts will continue to grow over the next two to three years at levels that increase financial risks gradually.
However, some analysts said the outlook for China’s economy improved in recent months, amid the government controls and improving corporate earnings. Tao Wang, Chinachief economist at Swiss bank UBS, said: “We think China’s debt risk has actually declined over the past year. While China’s credit growth continues to outpace nominal GDP growth, the gap has actually narrowed this year.”
The International Monetary Fund has warned of the dangers from China’s credit-fuelled economic strategy, which it warned might risk financial turmoil. It said the country was forecast to expand by 6.7%, although stressed that this was as a result of Beijing pursuing growth targets at the expense of the quality of economic output.
The IMF expects China’s total non-financial sector debt as a proportion of gross domestic product to rise to almost 300% by 2022, up from 242% last year.
S&P said the government was working to cut corruption and to improve governance at state agencies, local governments, and state-owned enterprises. Over time, it said, this could improve the private sector business environment.
Helena Huang, China economist at ICBC Standard Bank, said: “Though without any near-term credit risks amid Beijing’s recent regulatory tightening and deleveraging efforts, the key uncertainty still rests in the longer term on Beijing’s capability to resolve its debt conundrum.”
The downgrade from S&P brings its rating in line with assessments from Fitch and Moody’s, which lowered its rating for the country in May. S&P said it gave China a stable outlook for its credit rating, reflecting a view that the country would maintain its robust economic performance in the next three to four years.
By Richard Partington