S&P Downgrades China's Credit Rating, Saying Rocketing Debt Is Stoking Economic Instability

Peter Castro
September 22, 2017

Rising debt levels in China have prompted S&P Global Ratings to become the latest major credit rating agency to downgrade the country's sovereign debt.

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

The rating could rise again if a fall in debt levels is accompanied by continued fast growth, S&P added, although any sign of further easing of restrictions on credit would be negative. In any case, the bulk of China's government debt is bought by state-owned banks and held to maturity, the economist noted.

The IMF said in August it expected China's total non-financial sector debt to rise to nearly 300 percent by 2022, up from 242 percent previous year.

The agency forecast China's economic growth to remain strong at close to 5.8% or more annually through at least 2020.

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While S&P's announcement of a cut to the fifth-highest grade - the same as Moody's - puts fresh focus on China's debt issues, the structure of even its offshore bond market suggests there will be little impact on prices. Total debt has quadrupled since the financial crisis to hit $28tn (£22tn) at the end of past year.

Furthermore, over the medium-term Beijing's recently intensified efforts to stop excessive leverage might succeed in "stabilising" the trend in financial risk.

"It is in recognition of the reality that, concerns notwithstanding, the authorities are not planning to rein in credit growth in a forceful way", said Louis Kuijs at Oxford Economics in Hong Kong.

Helena Huang, China economist at ICBC Standard Bank, said: "Though without any near-term credit risks amid Beijing's recent regulatory tightening and deleveraging efforts, the key uncertainty still rests in the longer term on Beijing's capability to resolve its debt conundrum".

A recent Reuters analysis showed corporate debt is growing faster than past year, with few companies using stronger profits to reduce debt. "All that is an argument to say China's rating might still be too good".

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