S&P Global Ratings downgraded China’s long-term sovereign credit rating by one notch on Thursday to A+ from AA-, citing increasing risks from the country’s rapid build-up of credit.
“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’s downgrade follows a similar demotion by Moody’s Investors Service in May and comes as the government grapples with the challenges of containing financial risks stemming from years of credit-fuelled stimulus spurred by the need to meet official growth targets.
It also comes less than a month ahead of a highly sensitive twice-a-decade Communist Party Congress which will see a key leadership reshuffle.
Stephen Gallo, European head of FX strategy at BMO Financial Ground told CNBC via email that China’s domestic debt dynamic is a long-standing issue that most investors are already well aware of. “To be sure, the move by S&P this morning merely brings the ratings agency into line with where Moody’s and Fitch already were (i.e. 4 or 5 notches below triple-A). Therefore, the direct economic/market impact of today’s decision by S&P is low.”
Gallo further explained that this is not going to necessarily see direct translation into a weaker currency because restrictions on outbound flows are still relatively tight.
“If anything, the decision by S&P highlights the degree to which China will aim to keep leverage growth within the domestic economy low-to-moderate as opposed to high. This means that neither onshore rates nor the RMB are likely to drop sharply as a result of today’s news.”
Concerns about China’s sustained strong credit growth appear to be increasing, even as first-half economic growth beat expectations.
China’s stock markets were already closed Thursday when the downgrade was published, and there was little reaction from the yuan.
S&P said that recent efforts by the government to reduce corporate leverage could stabilize financial risks 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,” S&P said.
S&P also lowered China’s short-term rating to A-1 from A-1+.