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S&P cuts China’s credit rating

S&P cuts China’s credit rating

S&P Global Ratings has downgraded China’s credit rating, citing that a prolonged period of strong credit growth has increased China's economic and financial risks.

‘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.

Following the downgrade, analysts lowered the ratings of three Chinese policy banks, namely Agricultural Development Bank of China, China Development Bank Corporation, and the Export-Import Bank of China.

Similarly, ratings of three foreign banks operating in China - DBS Bank (China), Hang Seng Bank (China), and HSBC Bank (China) – were also downgraded.

‘I don’t think this is hugely surprising because China has built up debt to high levels and in some parts of the economy like the shadow banking system that leverage is exposing material risks,’ Guillermo Felices, senior fund manager for multi-asset solutions at BNP Paribas Asset Management, told Citywire Asia.

‘This comes precisely at a time when the credit impulse, the change in credit over GDP, is falling sharply, which raises questions about the vulnerability of the banking system and the sovereign effort that would be needed to bail them out.’

Felices added that these risks are well known but have not upset global markets yet, because the government has made efforts to keep the currency stable, despite its recent fall due to the government’s relaxation on yuan’s strengthening and capital control.

China’s onshore debt market has a market capitalisation of around $9.4 trillion, ranking the second worldwide. However, foreign investors’ holdings only make up around 2% of the total. The country’s total debt has risen rapidly to more than 260% of GDP from 160% in 2008, alarming in the context of a developing economy.

The growth of leverage has been mostly in debt issued by local governments, private enterprises, and state-owned enterprises, especially those in industries with excess capacity, such as iron and steel.

S&P’s China sovereign credit cut comes at a time when the government is preparing for its twice-a-decade leadership reshuffle. In the lead-up to the Communist Party Congress starting on October 18, the Chinese authorities would perhaps make more efforts to create a better market environment for investors.

In May, Moody’s Investors Service cut China’s sovereign debt ratings from AA3 to A1.

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