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China Vexed Over S&P Credit Rating Downgrade

China Vexed Over S&P Credit Rating DowngradeChina Vexed Over S&P Credit Rating Downgrade

China is angry at Standard and Poor’s following a downgrade of its creditworthiness by the ratings agency on concerns over the country’s rising debt. S&P underestimated China’s financial strength, Beijing said.

China’s Ministry of Finance said on Friday that S&P’s downgrade of Chinese sovereign debt was a “wrong decision” and based on a “long-standing mode of thinking, and misreading of the Chinese economy”, DW reported.

On Thursday, the New York based ratings agency cut China’s sovereign credit rating from A+ to AA- , however keeping the country’s outlook on “stable”. The one-notch downgrade came after Moody’s Investors Service made a similar move in May—the first time in almost three decades that the nation’s credit rating was cut.

In a statement, S&P said it decided to make the call after concluding that China’s “de-risking” drive that started early this year was having less of an impact on credit growth than initially expected.

“Despite the fact that the government has shown greater resolve to implement the deleveraging policy, we continue to see overall credit in the corporate sector to stay at a 9% point,” S&P senior director of sovereign ratings, Kim Eng Tan, said in a conference call. “We’ve now come to the conclusion that deleveraging is likely to be much more gradual than we thought could have been the case early this year.”

Debt-fueled investment in infrastructure and real estate has underpinned China’s growth for years. But Beijing has launched a crackdown amid fears of a potential financial crisis.

China’s banks extended a record 12.65 trillion yuan ($1.84 trillion) of loans in 2016, roughly the size of Italy’s economy. Total social financing—a broad measure of credit and liquidity in the economy—was a record 17.8 trillion yuan.

Tan said broader lending by all financial institutions has started to rise after growing by a relatively steady 12-13% in the last few years. “That was the key metric that we look at...and we believe while this growth of aggregate debt financing could come down somewhat over the next few years, it’s not likely to come down very sharply,” he noted.

But the finance ministry accused S&P of ignoring the country’s economic fundamentals and development potential as the world’s second-largest economy.

Moreover, analysts say China’s campaign to cut financial risks this year has had mixed success, prompting doubts whether Beijing is moving fast enough to avert the dangers of a debt crisis down the road.

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