S&P downgrades China's credit ratings

By Muhammed Ali Gurtas

ANKARA

International credit rating agency Standard and Poor's (S&P) downgraded China's sovereign credit ratings one step with stable outlook on Thursday.

"The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China's economic and financial risks," S&P said, as lowering its long-term sovereign credit rating to A+ from AA-, and short-term rating to A-1 from A-1+.

"The stable outlook reflects our view that China will maintain its robust economic performance and improved fiscal performance in the next three to four years," the agency said.

China's gross domestic product (GDP) grew 7.3 percent in 2014, 6.9 percent in 2015, and 6.7 percent last year, according to the International Monetary Fund (IMF) data. The IMF forecasts 6.7 percent economic growth for this year, and 6.4 percent in 2018.

"Since 2009, claims by depository institutions on the resident nongovernment sector have increased rapidly. The increases have often been above the rate of income growth," S&P said, adding:

"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."

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.

"However, we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually," it noted.

According to the IMF, total non-financial sector debt is 236.4 percent of China's GDP in 2016 and is projected to rise further to nearly 300 percent of GDP by 2022.

The S&P said it may increase China's ratings in case of a quite slow and lower credit growth if it kept real GDP growth at healthy levels.

"In this scenario, we believe risks to financial stability and medium-term growth prospects will lessen to lift sovereign credit support," the agency said.

"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," it said, adding:

"We expect such a trend to weaken the Chinese economy's resilience to shocks, limit the government's policy options, and increase the likelihood of a sharper decline in the trend growth rate."