Standard & Poor’s affirmed China’s sovereign ratings and said the outlook remains stable, citing the nation’s “exceptional” growth prospects, holdings of overseas assets and modest government indebtedness.
China’s long-term credit rating is AA- and its short-term rating is A-1+, the company said in a statement yesterday. S&P raised the nation’s long-term rating to the fourth-highest level on Dec. 16, 2010. Yesterday’s release is an annual report on the Chinese sovereign grade.
S&P is forecasting China will “maintain strong growth” as the nation funds investment spending, even after expansion that’s set to slow in 2012 to the weakest pace in 13 years. The country is heading into a decade under new leadership, with Xi Jinping, appointed chief of the ruling Communist Party this month, set to become president next year and Li Keqiang, the party’s No. 2, in line to replace Wen Jiabao as premier.
“We expect no major change in policy directions in China in the wake of the recent top leadership changes,” S&P said in a statement. “Efforts toward deepening structural and fiscal reforms are likely to continue.”
China’s economy may expand 7.7 percent this year, according to the median estimate in a Bloomberg News survey this month. That would be the lowest growth since 1999.
Yields on China’s 10-year government bonds have risen this year by 11 basis points to 3.55 percent, according to data compiled by Bloomberg. A basis point is equal to 0.01 percentage point. That compares with a decline in the U.S. 10-year note yield to about 1.64 percent from 1.88 percent.
Bond-market history indicates that the utility of sovereign ratings may be limited. Almost half the time, yields on government bonds fall when a rating action by S&P and Moody’s Investors Service suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.
After S&P stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose.
S&P said yesterday it may raise China’s credit rating if structural reforms lead to a “more vibrant” domestic debt capital market, more reliance on market-based macroeconomic management tools and a more flexible exchange rate. The rating may be cut if reform efforts weaken, the nation’s economic performance becomes “markedly lower” and conditions in the banking industry worsen more than expected.
Lack of transparency in China “lessens support for the government’s credit standing,” according to yesterday’s statement, which reiterated points S&P made last year. That could also increase the risks of policy mistakes as the Chinese economy increases in complexity, S&P said.
China’s lower average income than similarly-rated sovereigns is “another key credit weakness that may exacerbate the impact of errors in economic policies,” according to the statement.
S&P estimates China’s per capita real growth in gross domestic product in 2013-2015 at 7.3 percent, down from an average 10.2 percent over the five years through 2011.
Government debt should continue to fall as a share of GDP, declining to close to 13.4 percent of economic output by 2014, it said.
At the same time, China’s fiscal position is “somewhat weaker” than indicators suggest, with local governments owing significant off-budget debt, S&P said. The lack of timely and regularly available data and questions over the legal responsibilities of local governments make external monitoring of these debts “extremely difficult,” S&P said.
— With assistance by Nerys Avery