S&P Downgrades China Rating On Higher Risks

S&P Global Ratings downgraded China's sovereign ratings citing higher economic and financial risks after a prolonged period of strong credit growth.

The sovereign rating was lowered to A+ from AA-, S&P said in a statement on Thursday. The outlook on the long-term rating was stable.

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.

S&P's announcement came just a month ahead of 19th Party Congress.

The rating agency observed that claims by depository institutions on the resident non-government sector have increased rapidly since 2009.

Although this credit growth had contributed to strong real GDP growth and higher asset prices, S&P said it has diminished financial stability to some extent.

In the medium term, the recent intensification of government efforts to rein in corporate leverage could stabilize the trend of financial risk, the agency added.

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.

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

S&P noted that the government has taken steps to bolster its economic and fiscal resilience and also made considerable reforms to its budgetary framework.

The agency forecast China's economic growth to remain strong at close to 5.8 percent or more annually through at least 2020.

Further, S&P still sees China's external profile as a key credit strength, despite the recent decline of foreign exchange reserves.

The stable outlook on ratings reflects the assessment that China will maintain its strong economic showing and improved fiscal performance over the coming three to four years.

ING Bank economist Iris Pang does not agree with S&P that economic and financial risks are rising. Possibly, the declining leverage ratio is the reason for S&P changing China's outlook from negative to stable, she said.

Ratings changes typically cause ripples rather than waves, Mark Williams at Capital Economics said. In any case, the bulk of China's government debt is bought by state-owned banks and held to maturity, the economist noted.

The timing is awkward for China's leaders, immediately ahead of next month's Party Congress, and arguably questionable on the basis of recent economic and financial developments, Williams added.