S&P downgrades China's credit rating over debt fears

CHINA-ECONOMY-GROWTH

CHINA-ECONOMY-GROWTH

While credit-rating changes in any case have a varied track record when it comes to influencing pricing over the longer term, China's debt landscape is much more insulated than for other developed and even emerging nations, given the Communist Party's top-down control of the economy and financial markets.

In the span of almost a decade, China went from a country with few loans to one with debt levels comparable to those of the United States.

A war of words has broken out between Beijing and a rating agency over the state of China's economy, just a month before the important party congress at which President Xi Jinping will consolidate his power.

"This is a steady, gradual deterioration in the risk profile of China", Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong, said after S&P made the announcement on Thursday.

"It is mind-boggling for S&P to lower China's sovereign rating in such a situation", the ministry said.

But Shen said it was wrong to overplay the impact of debt on China's economic growth. Fiscal spending rose 13.1 percent for January-August, providing strong support for stable growth and economic restructuring, the MOF said.

In a move that's raised the eyebrows of global economists, Standard & Poor's downgraded China's credit rating to A+ overnight.

"This misreading also overlooks the good fundamentals and development potential of China's economy".

Total Chinese nongovernment debt rose previous year to the equivalent of 257 percent of annual economic output, according to the Bank for International Settlements. A recent Reuters analysis showed few listed companies including state-controlled firms are using a profit windfall this year to reduce their debt burden. But private sector analysts say they are moving too slowly.

The downgrade followed a cut in May by Moody's, a rival rating agency.

"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.

"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".

The rating "ignores the unique characteristics of the capital raising structure of China's financial markets", it said. Credit continues to expand faster than output, signalling significant ongoing misallocation of resources.

Chinese economic growth fell from 14.2 percent in 2007 to 6.7 percent a year ago, though that still was among the world's strongest.

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