S&P lowers China’s credit rating, citing rising financial risks and debt; Beijing hits back, calls it “wrong decision”

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A file shot of Shanghai. Photo courtesy: Asian Development Bank

Ratings agency Standard and Poor’s (S&P) lowered China’s sovereign credit rating due to risks associated with its increasing debt, but said its long-term outlook for the country remained “stable”, triggering a volley of criticism from Beijing.

The credit rating agency cut China’s credit rating from A+ to AA-, putting it in the same category as countries such as the United States and Austria.

“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said in a statement.

“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.

China hit back at the downgrade of the country’s sovereign credit rating, with the finance ministry calling it a “wrong decision.”

The Ministry of Finance (MOF) website described the decision as “perplexing,” with the economy on a firm footing.

“The downgrade is a result of international rating agencies’ long-standing mode of thinking, and a misreading of the Chinese economy based on developed countries’ experiences,” read the statement on the website.

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 where President Xi Jinping is expected to cement his power further.

Moody’s Investors Service had already cut China’s rating in May, citing the country’s worsening debt outlook, which economists point out will further slow China’s economic growth.

Curbing debt a challenge?

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 $28trillion at the end of last year.

The Chinese government has moved to curb rising levels of debt among domestic companies, restricting firms from investing in foreign media and sport industries.

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.

The International Monetary Fund (IMF) has also warned of the dangers from China’s credit-fuelled economic strategy, which it warned might risk financial turmoil.

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.

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