Standard & Poor's downgraded China's long-term debt rating by one notch to 'A+' and the country's short-term debt rating to 'A-1'. The outlook is stable. This was announced by the rating agency, explaining that "the downgrade reflects our assessment of an increase in economic and financial risks in the country following a prolonged period of strong credit growth", while the stable outlook "reflects the our view that China will maintain solid economic performance and improved fiscal performance in the next 3-4 years.”
“Since 2009 financial institutions' claims on the non-government sector have grown rapidly with increases often exceeding income growth,” S&P explained, adding that 'although this increase in credit has contributed to strong growth in real GDP and a rise in asset prices, we believe that to some extent it has also decreased financial stability'”. The agency adds that “the recent intensification of efforts by the Government to curb corporate debt could stabilize the trend of financial risks in the medium term. However, we expect credit growth over the next two to three years to remain at levels that will gradually increase financial risks." S&P also estimates "Chinese GDP growth of more than 4% per year" in the future, "even if the increase in public investment will slow down further" and also expects a decline in the fiscal deficit based on changes in the debt-to-GDP ratio in general. The rating of the former Celestial Empire could be raised, continues S&P, "if credit growth slows significantly and is sustained well below current rates while maintaining real GDP expansion at robust levels".
A new downgrade would instead be possible, notes S&P, "if we see a decline in China's efforts to curb the growing financial risks and to allow an acceleration of credit growth to support economic growth as such a trend would weaken the country's resistance to shocks and would limit the government's policy options, as well as increase the possibility of a reduction in growth".
S&P estimates that Chinese GDP growth close to 5,8% or more through at least 2020 and per capita GDP above $10 by 2019, up from $8.300 expected in 2017. Lastly, over the period 2017-2020, according to S&P , the country's deficit should be close to or below 2,5% of GDP.
