Photographer: Qilai Shen/Bloomberg

S&P Affirms China Rating With Warning Financial Risks Are Rising

  • Threats could result in a rating downgrade this year or next
  • Anti-corruption campaign supports creditworthiness, S&P says

S&P Global Ratings maintained its negative outlook on China, citing increasing economic and financial risk that it said could cause a downgrade in coming months.

The credit rating was affirmed as AA- with a negative outlook, which S&P has maintained since it cut the outlook for the economy from stable to negative in March. It also affirmed the A-1+ short-term sovereign credit ratings.

“The negative outlook reflects our view of gradually increasing economic and financial risks to the government’s creditworthiness, which could result in a downgrade this year or next,” Singapore-based credit analyst Kim Eng Tan wrote in a report Thursday. “China’s reforms to its fiscal and monetary policies, coupled with its anti-corruption campaign, should help support its sovereign creditworthiness.”

Reliance on credit-fueled growth also adds to the risk of a hard landing for the economy, Tan said, adding that the negative outlook was mainly based on the “gradually increasing economic and financial risks.” The last change to the rating was December 2010, when it was raised from A+.

Economic growth over the next three years will be at least 5.5 percent annually, and supporting the expansion may require heavy public investment by the government given the uncertain external economic environment, Tan said.

The report followed another that also cited heavy borrowing. China’s large debt will lead to substantially slower economic growth by the end of the decade rather than an outright financial crisis, Fitch said in a statement this week.

The contribution from consumption will likely increase, but in the meantime, the investment rate is likely to remain above 40 percent of gross domestic product, with credit growth outpacing the economic expansion over the same period, Tan said.

S&P would downgrade if it saw a higher likelihood China seeks to stabilize growth at or above 6.5 percent “by allowing credit to increase significantly faster than the nominal GDP growth,” Tan said.

— With assistance by Miao Han

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