S&P Downgrades China To A+ From AA- Due To Soaring Debt Growth

Tyler Durden's picture

Four months after Moody's downgraded China to A1 from Aa3, unwittingly launching a startling surge in the Yuan as Beijing set forth to "prove" just how "stable" China truly is through its nationalized capital markets, moments ago S&P followed suit when the rating agency also downgraded China from AA- to A+ for the first time since 1999 citing risks from soaring debt growth, less than a month before the most important congress for Chiina's communist leadership in the past five years is set to take place. In addition to cutting the sovereign rating by one notch, S&P analysts also lowered their rating on three foreign banks that primarily operate in China, saying HSBC China, Hang Seng China and DBS Bank China Ltd. are unlikely to avoid default should the nation default on its sovereign debt. Following the downgrade, S&P revised its outlook to stable from negative.

“China’s prolonged period of strong credit growth has increased its economic and financial risks,” S&P said. “Since 2009, claims by depository institutions on the resident nongovernment sector have increased  rapidly. The increases have often been above the rate of income growth.  Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to  some extent."

According to commentators, the second downgrade of China this year represents ebbing international confidence China can strike a balance between maintaining economic growth and cleaning up its financial sector, Bloomberg reported. The move may also be uncomfortable for Communist Party officials, who are just weeks away from their twice-a-decade leadership reshuffle.

The cut will “have a relatively big impact on Chinese enterprises since corporate ratings can’t be higher than the sovereign rating,” said Xia Le, an economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It will affect corporate financing.”

“The market has already speculated S&P may cut soon after Moody’s downgraded,” said Tommy Xie, an economist at OCBC Bank in Singapore. “This isn’t so surprising.”

S&P said that its stable outlook "reflects our view that China will maintain robust economic performance over the next three to four years. We expect per capita real GDP growth to stay above 4% annually, even as public investment growth slows  further. We also expect the stricter implementation of restrictions on  subnational government off-budget borrowing to lead to a declining trend in the fiscal deficits, as measured by changes in general government debt in terms of GDP."

Whereas the Yuan tumbled following the Moody's downgrade in May, ironically this time the currency has actually strenghtened after a brief kneejerk response lower.

* * *

Full S&P text below.

People's Republic Of China Ratings Lowered To 'A+/A-1'; Outlook Stable

OVERVIEW

  • China's prolonged period of strong credit growth has increased its  economic and financial risks.
  • We are therefore lowering our sovereign credit ratings on China to  'A+/A-1' from 'AA-/A-1+'.
  • The stable outlook reflects our view that China will maintain its robust  economic performance and improved fiscal performance in the next three to  four years.

RATING ACTION

On Sept. 21, 2017, S&P Global Ratings lowered the long-term sovereign credit  ratings on China to 'A+' from 'AA-' and the short-term rating to 'A-1' from 'A-1+'. The outlook on the long-term rating is stable. We have also revised our transfer and convertibility risk assessment on China to 'A+' from 'AA-'.

The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China's economic and financial risks. Since 2009, claims by depository institutions on the resident nongovernment sector have increased rapidly. The increases have often been above the rate of income growth. Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent.

The recent intensification of government efforts to rein in corporate leverage could stabilize the trend of financial risk in the medium term. However, we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually.

OUTLOOK

The stable outlook reflects our view that China will maintain robust economic performance over the next three to four years. We expect per capita real GDP growth to stay above 4% annually, even as public investment growth slows further. We also expect the stricter implementation of restrictions on subnational government off-budget borrowing to lead to a declining trend in the fiscal deficits, as measured by changes in general government debt in terms of GDP.

We may raise our ratings on China if credit growth slows significantly and is sustained well below the current rates while maintaining real GDP growth at healthy levels. In this scenario, we believe risks to financial stability and medium-term growth prospects will lessen to lift sovereign credit support.

A downgrade could ensue if we see a higher likelihood that China will ease its efforts to stem growing financial risk and allow credit growth to accelerate to support economic growth. We expect such a trend to weaken the Chinese economy's resilience to shocks, limit the government's policy options, and increase the likelihood of a sharper decline in the trend growth rate.

RATIONALE

The ratings on China reflect our view of the government's reform agenda, growth prospects, and strong external metrics. On the other hand, we weigh hese strengths against certain credit factors that are weaker than what is typical for similarly rated peers. For example, China has lower average income, less transparency, and a more restricted flow of information.

Institutional and economic profile: Reforms to budgetary framework and financial sector in progress

  • China's policymaking has helped it to maintain consistently strong economic performances since the late 1970s.
  • We project China's per capita GDP to rise to above US$10,000 by 2019, from a projected US$8,300 for 2017.

The Chinese government is taking steps to bolster its economic and fiscal resilience. We view the government's anti-corruption campaign as a significant move to improve governance at state agencies, local governments, and state-owned enterprises (SOEs). Over time, this could translate into greater confidence in the rule of law, improvements in the private-sector business environment, more efficient resource allocation, and a stronger social contract.

The government continues to make significant reforms to its budgetary framework and the financial sector. These changes could yield long-term benefits for China's economic development. The government also appears to be signaling that it will allow SOEs with lesser policy importance to exit the market either through merger, closure, or default in order to allocate resources more efficiently. More recently, it has also indicated financial stability as a top policy priority and is acting to rein in growth of public sector borrowing. However, we believe some local government financing vehicles, despite their diminishing importance, continue to fund public investment with borrowings that could require government resources to repay in the future.

China's policymaking has helped it to maintain consistently strong economic performances since the late 1970s. However, coordination issues between the line ministries and the State Council sometimes lead to unpredictable and abrupt policy implementation. The authorities also have yet to develop an effective communication channel with the market to convey policy intent, heightening financial volatility at times. Moreover, China does not benefit from the checks and balances usually coming from the free flow of information. These characteristics can lead to the misallocation of resources and foster discontent over time.

We expect China's economic growth to remain strong at close to 5.8% or more annually through at least 2020, corresponding to per capita real GDP growth of above 5.4% each year. We also expect credit growth in China to outpace that of nominal GDP over much of this period.

We project China's per capita GDP to rise to above US$10,000 by 2019, from a projected US$8,300 for 2017, given our assumptions about growth and the continued strength of the renminbi's real effective exchange rate. Over the next three years, we expect final consumption's contribution to economic growth to increase. However, we believe the gross domestic investment rate is likely to remain above 40% of GDP.

Flexibility and performance profile: External profile remains key strength

  • We expect financial assets held by the public and financial sectors to exceed total external debt by more than 90% of current account receipts (CAR) at the end of 2017. At the same time, we estimate China's total external assets will exceed its external liabilities by 65% of its CAR.
  • In 2017-2020, we project the increase in general government debt in each of these years at 2.8%-4.9% of GDP. We project net general government debt will fall toward 46% of GDP in the period to 2020 and interest cost to government revenue will remain below 5% throughout the forecast horizon.
  • We believe China's monetary policy is largely credible and effective. We believe the liberalization of deposit rates at banks in recent years is an important reform that could further improve monetary transmission in China.

China's external profile remains a key credit strength despite the recent decline of its foreign exchange reserves. We partly attribute the fall in reserves in 2016 to increased expectations of renminbi depreciation. Consequently, some private sector firms reduced or hedged their dollar debt and exporters kept a greater share of their proceeds in foreign exchange. We also attribute the accommodation of SOE and private-sector demand for foreign exchange as a willingness of officials to diversify China's external assets away from holdings of U.S. government debt to other investments of the financial and private sectors.

China remains a large external creditor. We expect financial assets held by the public and financial sectors to exceed total external debt by more than 90% of current account receipts (CAR) at the end of 2017. At the same time, we estimate that China's total external assets will exceed its external liabilities by 65% of its CAR. China's external liquidity position is equally robust. We expect the country to sustain its current account surplus at more than 2% of GDP in 2017-2020. We project annual gross external financing needs in 2017-2020 to total less than 60% of CAR plus usable reserves.

The increasing global use of the renminbi (RMB) also bolsters China's external financial resilience. According to the Bank for International Settlements' (BIS) "Triennial Central Bank Survey," published 2016, the renminbi was traded in 4% of foreign exchange transactions globally. We therefore assess the RMB as an actively traded currency. Demand for renminbi-denominated assets from both official and private-sector creditors could rise with the inclusion of the renminbi in the IMF's Special Drawing Rights basket of currencies.

We expect the share of renminbi-denominated official reserves to rise over time. If the renminbi achieves reserve currency status (which we define as more than 3% of aggregated allocated international foreign exchange reserves), it could strengthen external and monetary support for the sovereign ratings. Although the People's Bank of China (the central bank) does not operate a fully floating foreign exchange regime, it has allowed greater flexibility in the nominal exchange rate over the past decade. Based on estimates from the BIS, the real effective exchange rate has appreciated by close to 10% since the end of 2011. Any future weakness of the renminbi needs to be analyzed in this light.

China is gradually implementing an ambitious fiscal reform to improve fiscal transparency, budgetary planning and execution, and subnational debt management. These reforms could help the government to manage slower growth of fiscal revenue and lower its reliance on revenue from land sales.

In 2017-2020, we expect the Chinese government to keep the reported general government deficit close to, or below, 2.5% of GDP. However, off-balance-sheet borrowing could continue for the next two to three years. This reflects both the financing needs of public works started before 2015 as well as some new projects that the central government is willing to authorize to support growth. Consequently, we project the increase in general government debt in each of these years at 2.8%-4.9% of GDP.

We now include the entire sum of nearly RMB25 trillion (US$3.9 trillion, or approximately 36% of 2015 GDP) of government-related debt from local government financing vehicles in general government debt. We have also included the debts of China Railway Corp. in general government debt. The company was previously the Ministry of Rail but was incorporated as a special industrial enterprise. Bonds issued by the company are held on China banks' books at a lower capital charge compared with other corporate debt.

We offset these debts to compute net general government debt with fiscal deposits held by the government, net assets of the China Investment Corp. and net assets of the National Council of Social Security Funds. Using this method, we project net general government debt will fall toward 46% of GDP in the period to 2020 and interest cost to government revenue will remain below 5% throughout the forecast horizon. These forecasts in turn follow from our assumptions regarding real growth and ample domestic liquidity keeping financing cost low for the government.

Although the fiscalization of the local government financing vehicles and China Rail Corp. has raised our figure for general government debt, it has simultaneously decreased our estimates for contingent liabilities to the government from this sector. Entities with weak financial metrics owe much of the financing vehicle loans that are being redeemed through government bond issuance. By putting these loans on the government's balance sheet, the government has significantly reduced the banks' credit risks, in our view.

We believe China's monetary policy is largely credible and effective, as demonstrated by its track record of low inflation and its pursuit of financial sector reform. Consumer price index inflation is likely to remain below 3% annually over 2017-2020. Although the central government--through the State Council--has the final say in setting interest rates, we find that the central bank has significant operational independence, especially regarding open-market operations. These operations affect the economy through a largely responsive interbank market and a sizable and fast-expanding domestic bond market. The liberalization of deposit rates at banks in recent years is an important reform that could further improve monetary transmission in China.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Arnold's picture

If the chink numbers represented much more than smoke, I might break out in nightmares and a cold sweat.

Arnold's picture

And I will say the same thing about the Fractional Ratings Houses, that are predictive of fractionally more than nothing.

Keyser's picture

pot, meet kettle... The US debt is now what? 

Arnold's picture

Yup, we can speak with authority, gained from experience.

tmosley's picture

China is junk because they are afraid of crypto. Any country that tries to fight the future is going to go tits up.

Arnold's picture

It's one thing when you uthanize the mobs.

You don't ever want the mobs coming after you.

Mao's purges are less than a generation ago.

Exponential monetary growth does not provide exponential lifestyle improvement for most.

wafm's picture

talking thru your fuckin ass is one thing, expecting others to take you seriously is another...

GodHelpAmerica's picture

Your utopian outlook and how it relates to money is going to be in for a very rude awakening. History is not on your side. Unless there's a bloody revolution, the little guys have zero chance of winning in this case. Until then, crypto is exclusively a speculation play on technology--not money. Get it?

Ofelas's picture

US 85 trillion debt including committments that are legally enforceable.....but all is fine

DieselChadron's picture

HA!  Legally enforcable HOW??  You gonna force them to pay?

new game's picture

i have zero faith in digital currency. It is just speculators whereby some stupid folks will be bagged(fiat removal)...

as a side note, gold is getting hammered down today. It must be a high nail that janet snagged her stocking on...

tmosley's picture

Hahaha, you guys are such a bunch of little crybabies.

The last ledger money lasted for more than 700 years. How's THAT for history?

>the little guys have zero chance of winning'

Kill yourself, tbh.

Consuelo's picture

 

 

The wave of the future, cryptocurrency is.    What name or government umbrella it ultimately falls under is another story.   Speculative play under the current scenario, yes.   A 'legal tender' under Force-of-law is what it will ultimately become.

ClassicCommodity's picture

Bitcoin and Monero/XMR.

 

Get your money out of the system before it is too late.

Cash2Riches's picture

This is just an ongoing continuation of the currency wars, that have never ended and will eventually explode onto the scene. China is not going to take this lightly, they will fire back.

yogibear's picture

Hey China,

Now Trump and Wall Street going to try and take you down financially.

Got that!

 

francis scott falseflag's picture

The opposite of the woodie you get from the numbers the Fed makes up and feeds denialists like you.

Bah!

DaBears's picture

90% of Chinese "GDP" is spent on fixed capital investments in the likes of ghost cities and roads to no where. All government has to do is command, fix, pump or peg their artificial valutions to create artifical "GDP". It's same playbook when USSR had "$7.5" trillion "GDP" back in the 80's but we know what happened to those type of  fantasy magical numbers in real floating market, Russia's real GDP is that of Italy's according to standardized free market accounting methods, China uses their own set of "rules" or command.

hestroy's picture

What about USA?

Joe A's picture

Ah, the rating war has begun. Next step in the trade and sanctions war.

Big Brother's picture

Doesn't China have its own ratings agency to downgrade the US?  I recall reading an analysis by Dagong on the US' growth in entitlement and military spending.  It read pretty smoothly so whoever translated it did a good job.

 

DieselChadron's picture

Ratings don't mean shit.  As I recall, all of those ratings houses had the mortgage backed crap rated AAA.

BritBob's picture

Maybe XI will get the Argentinians to help out?  You scratch my back I'll scratch yours?

 

China – Argentina – the Falklands

In tune with Macri's words, Xi Jinping thanked Argentina "the support they have given us for our claim of a single China as we support theirs for the Falkland Islands."  (Telam 17 May 2017)

How can Argentina claim the Falklands when she has never legally owned them?

Falklands- Never Belonged to Argentina (1 page):

 

https://www.academia.edu/31111843/Falklands_Never_Belonged_to_Argentina

Fireman's picture

If you can deal with Britland having turned into a paki grooming pedophile paradise, you will no doubt learn to live with Las Malvinas when it returns to its rightful owner, Argentina.

Joe A's picture

Then Argentina should return to its rightful owner, the natives of Argentina. Oh wait, there aren't any left. Annihilated by the Argentines (who btw are a mix of Spaniards, Italians and..... Basques and Catalans.....)

PoorWhiteMan's picture

Bob, you're the fucking man! I personally don't know shit about Gibraltar or the Falklands, but I like that you never give up!

Fireman's picture

It's already over as China's gold backed Yuan brings the Saudi Barbarian oil peddlers under its wing. Now that the USSAN banksters have stolen back all that "treasury" debt owed to the feudal crypt of Saud and tried to frame them for 9 11..... Kiss the IOU Petroscrip (no longer) I$I$ backed Saudi Mercan toilet paper free loader dollah goodbye. Jim Wille's Scheiß dollah is coming home to Slumville in a tsunami of toxic derivative shit after all the lost judaic wars and bananas republic debt splurge and it's going to guarantee overnight Third World status for 98% of USSANS, already on the edge of ruin. No one likes a slacker and a hustler and the "exorbitant privilege" reserve currency gig is over as the Pentacon mob fizzle out in a swamp of hubris. China's Korea and China's "big, beautiful" South China Sea "resort" islands are bristling with big sticks and USSA can do NOTHING, and the rest of humanity knows it and enjoys seeing the snaggle-toothed, drug-addled, big mouth dumb a$$ mutt get kicked in the face. Ya'll had a good run as long as the anglozionazi abomination lasted but now it's high time to get out while you're still ahead. Dump the petroscrip and prep before the big flush washes you down the Wall St bankster sewer in the imploding shitter of the Potemkin Village idiot "economy" of misery and carnage for the Zero 1% scum that own US.

The only war USSANS will be fighting in the future is the long postponed and much overdue Slumville Civil War reloaded.

 

https://www.youtube.com/watch?v=Qd2T8OHnxmE

NoDebt's picture

That that, China!  Now fix our North Korea probem for us.

 

Bobbyrib's picture

Ok, ok. We won't sanction you. We'll downgrade your debt right after Moody's did to fuck with you. Trump is a coward. Just sanction them already.

yogibear's picture

Trump is already having Wall Street take China down.

Take that China!!!

tuetenueggel's picture

Why should they ?

They keep USA buisy

Last of the Middle Class's picture

More downgrade for you!

thunderchief's picture

Just another excellent reason for China to start dumping Treasuries. 

Bobbyrib's picture

They'd probably get downgraded further for not having premier collateral like US Treasuries..lol.

yogibear's picture

LOL,

China dumps treasuries and the Federal Reserve, BOJ, ECB or BOE buys them.

No effect.

 

DemandSider's picture

No problem, they'll just buy Standard and Poors and everthing's rosey again. Maybe they already have.

GodHelpAmerica's picture

All major fiat currencies have enormous risks associated with them. The bubble in fiat, globally, is the root cause of all other systemic problems.

Arnold's picture

I like my little Fiat.

It gets me to the end of the driveway and back, all in the same day.

https://www.bing.com/images/search?view=detailV2&ccid=hybG4kEn&id=F0C00C...

Arnold's picture

Yup, sorry, trying to wade through my wife's new windows 10 wireless everything HP box.

I have my doubts that I can make it useable.

I hate the wireless keyboard and mouse lag.

Jack Oliver's picture

Big deal !! China is giggling !!

charlewar's picture

S&P keeps its stellar rating system intact...despite rating MBS "AAA" a decade ago.

Last of the Middle Class's picture

LOL, China just got the memo.

Pliskin's picture

The american regime should shout a bit louder, I don't think China heard them!  They were too busy launching a new high speed train, this one the fastest in the world...

https://www.rt.com/business/404059-china-train-fuxing-shanghai-beijing/

Still, probably doesn't compare to all those american high speed coast-to-coast trains...oh wait!

#MAGAMA

Make America Great Again My Arse

 

PoorWhiteMan's picture

Public transportation makes no sense in the states.

Pliskin's picture

Ny to LA in 4 hours, cheaper than a flight, more convenient, and you don't need to have an anal probe by the TSA.

Aaaand...the East Coast niggas can be up at dawn, train to the West Coast, be shootin' up dem hommies at noon, outside da KFC, and back home in da Bronx for Moma's grits by supper time, all da sense in da wurld playa, shit Mayu, you be trippin'.

 

 

I apologise in advance for this comment, don't know what I was thinking!

I'm off now to self-flagellate.

 

land_of_the_few's picture

Fuxing High-Speed Train :D

Means "Rejuvenation", apparently .....!