S&P downgrades China's credit outlook to negative

Standard & Poor’s cut China’s credit rating to negative from stable, saying the country’s economic rebalancing is likely to proceed more slowly than it had expected.

The ratings agency said it revised the outlook to reflect its expectation that the economic and financial risks to the Chinese government's creditworthiness are gradually increasing.

“This follows from our belief that, over the next five years, China will show modest progress in economic rebalancing and credit growth deceleration.

“We project that China's economic growth over the next three years will remain at or above 6% annually. However, government and corporate leverage ratios are likely to deteriorate, in our view, and the investment rate could be well above what we believe to be sustainable levels of 30%-35% of GDP and among the highest ratios of rated sovereigns.”

S&P maintained its AA- rating on China, saying the government was taking steps to bolster its economic and fiscal resilience.

“Most importantly, we view the government's anti-corruption campaign as a significant move to improve governance at state agencies and state-owned enterprises (SOEs),” it said.

The ratings agency argued that 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.

S&P said a downgrade could be on the card if it sees a higher likelihood that China will seek to stabilise growth at or above 6.5% by increasing credit at a significantly faster rate than the nominal GDP growth.