S&P downgrades China's rating, cites rising debt

S&P Global Ratings downgraded China’s long-term sovereign credit rating on Thursday, less than a month ahead of one of the country’s most sensitive political gatherings, citing increasing risks from its rapid build-up of debt.

S&P’s one-notch downgrade to A+ from AA- comes as Beijing grapples with the challenges of containing financial risks stemming from years of credit-fueled stimulus to meet ambitious government economic growth targets.

“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, adding that the ratings outlook was stable.

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. The demotion follows a similar move by Moody’s Investors Service in May.

While S&P’s move put its China ratings on par with those of Moody’s and Fitch, the timing raised eyebrows just weeks ahead of a twice-a-decade Communist Party Congress (CPC), which will see a key leadership reshuffle and the setting of policy priorities for the next five years.

“The downgrade is a timely reminder for the authorities that China needs to bite the bullet on some of the more painful reforms that have been left to last, namely corporate deleveraging and restructuring of state-owned companies,” said Rob Subbaraman, an economist at Nomura in Singapore. “The focus needs to shift from quantity to quality of growth. I hope that later this year China lowers its GDP growth target to 6 per cent to 6.5 per cent, or not have one at all. That would be a positive sign.”   

Debt Worries

• S&P Global Ratings has downgraded China’s sovereign rating to  A+, which is a notch below its earlier AA- rating. 
• The downgrade was caused due to China’s mounting debt. India’s rating is BBB+, which a notch lower than China’s A+.
• Lower rating discourages investors from investing in countries of such poor credit profile. It will also increase bond rates.