(Yicai Global) Sept. 22 -- International credit ratings agency Standard & Poor’s Financial Services LLC yesterday downgraded China’s sovereign credit rating to A+ from AA- but revised its outlook from negative to stable.
Many Chinese scholars believe the theories adopted by S&P to set the ratings are not up to speed with global economic development and China’s advancement in particular. The ratings don’t reflect China’s development in a timely, objective manner or define an economic trend, so the country should see it as a ‘kind reminder’ but not take it too seriously, state-owned news agency Xinhua reported.
China’s prolonged period of strong credit growth has increased economic and financial risks, the credit agency said in its report. The Chinese government has made efforts to rein in corporate leverage, which could stabilize risk in the medium term, it added, but credit growth is set to remain high in the next two to three years which will continue to up financial risks.
“Judging by the reasons given by S&P, it mostly seems to be concerned about credit and liquidity risks,” said Li Xin, an associate professor at Beijing Normal University’s Institute of National Accounts. “That’s fine, but concluding that risks in China’s financial systems have increased and lowering the rating based on changes in short-term indicators is questionable.”
The downgrade isn’t surprising, said Qiao Baoyun, president of the Central University of Finance and Economics’ China Public Finance and Policy Institute, as another ratings agency, Moody’s, did the same. Qiao also believes that S&P isn’t keeping up with China’s rapid development, and feels it did not rationally assess the country’s economic resilience.
China has long focused on dealing with its leverage issue and made some progress. Its leverage ratio at non-financial companies stood at 166.3 percent as of the end of last year, marking the first quarterly decline after rising for 19 straight quarters. China’s credit-to-gross domestic product gap fell 4.2 percentage points from the end of the first quarter in 2016 to year-end, marking three straight quarterly drops and suggesting that an ease in debts. The credit-to-GDP gap is defined as the difference between the credit-to-GDP ratio and its long-run trend.
“Ratings by these companies are in many cases just hindsight,” Liang Hong, chief economist at China International Capital Corp. Ltd., told Yicai Global. “When problems occur, they don’t notice. But when the problems are addressed, they start paying attention.”
Analysts don’t believe the downgrade will have much impact on China’s appeal to foreign investors, as macro data, such as employment, corporate earnings and industrial output figures, are still performing well. More importantly, the government is continually improving the business environment.