China Finance Ministry Says S&P's Downgrade Is 'Wrong Decision'

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  • Cut called ‘perplexing’ because economy is on a solid footing
  • Debt analysis framework ‘has problems,’ state researcher says

China Government Taking on More Risk, Says Darby

China rebuffed the S&P Global Ratings downgrade of its sovereign credit rating, calling it a "wrong decision" that ignores sound economic fundamentals and development potential.

The government is fully capable of maintaining financial stability if it remains prudent on lending, strengthens supervision, and controls credit risk, the Ministry of Finance said in a statement Friday, a day after S&P cut China’s sovereign rating for the first time since 1999. The decision is "perplexing" because the economy is on a solid footing, the ministry said.

China can maintain reasonable credit growth, and S&P also ignores the characteristics of the country’s financing structure, the ministry said. Under the Budget Law, the debt of local government financing vehicles should be paid by those state-owned enterprises themselves, and local governments don’t shoulder the liabilities, it said.

The downgrade, the second by a major ratings company this year, comes just before President Xi Jinping gathers delegates from the ruling elite for the Communist Party’s twice-a-decade congress, set for Oct. 18. Xi has made it a top priority this year to curb debt risk and ensure stability before his big moment, which will include a reshuffle of top leaders.

The government also responded with a briefing Friday in Beijing. S&P overstates government debt by including some debt of state-owned enterprises, Liu Shangxi, head of of the Finance Ministry’s Chinese Academy of Fiscal Sciences, told reporters. Liu added that the debt analysis framework used around the world "has problems" because it neglects how debt is used.

The ministry also objected in May to the downgrade by Moody’s Investors Service, calling it “absolutely groundless” to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities. The agency underestimates the capability of the government to enact reforms and boost demand, the ministry said.

The official Xinhua News Agency also responded to S&P. The downgrade isn’t surprising, as the agency’s theory doesn’t reflect China’s fast economic development, Xinhua reported, citing Qiao Baoyun, a researcher at China’s Central University of Finance and Economics.

The problems S&P identified, including the need to deleverage and prevent local government debt risk, are a "friendly reminder," the state-run news service said, adding that China doesn’t need to heed unreasonable demands, or "cut its feet to fit the shoes."

— With assistance by Yinan Zhao, Miao Han, Jing Jin, and Dexter Roberts

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