REPEAT: S&P: Future China Ratings Changes Depend on Govt Moves

Repeats Story Initially Transmitted at 06:11 GMT Sep 22/02:11 EST Sep 22

--China MOF Calls Ratings Downgrade 'Wrong Decision' 

--Hong Kong Loses Triple-A Rating

By Vince Morkri

     BEIJING (MNI) - S&P Global Ratings left open the possibility that it could

upgrade China's sovereign credit ratings in the future if the government

successfully reins in rising debt and promotes the renminbi as a reserve

currency, or cut them further if its deleveraging campaign peters out. 

     S&P downgraded China's long-term sovereign credit ratings because it saw

the country's debt rising at a rate that would increase financial risks over the

next two to three years, Kim Eng Tan, the senior director of sovereign ratings

at S&P Global Ratings, said in a press conference Friday. 

     Tan said S&P could upgrade the ratings if credit growth slows

"significantly," but downgrade them if the Chinese government eases its efforts

to stem financial risks and allows credit growth to accelerate. He also said the

ratings could be raised if S&P "sees data of the renminbi becoming so important

in the international markets, we see [it] as a reserve currency."

     On Thursday, S&P announced that it had cut China sovereign credit rate to

A+ from AA- because of what it said was a "prolonged period of strong credit

growth" that has increased the country's financial and economic risks. The

downgrade drew a strong rebuke from Beijing. 

     S&P, in making the one-notch downgrade, said that although credit growth

had helped lift real GDP growth, it had "also diminished financial stability to

some extent." S&P also lowered China's short-term rating to A-1 from A-1+. It

was S&P's first ratings downgrade of China since 1999.

     China's Finance Ministry sharply criticized the ratings downgrade, saying

it was a "wrong decision" that was "confusing," given the economic strides China

has made over the past few years and the fact that the government is actively

pushing supply-side reforms and has implemented a country-wide deleveraging

campaign. 

     The MOF said in a statement on its website that it was a "pity" that S&P

had chosen to focus on China's fast credit growth and debt issues, but ignore

the country's "distinctive financing structure" and wealth-creating effect of

government spending.

     "The downgrade is a result of the international rating agencies' inherent

mode of thinking, and a misreading of the Chinese economy based on developed

countries' experiences," the ministry said.

     Tan said that even though China has been "growing strong and that

sentiments are improving" in regards to its economy, its GDP growth was in large

part being fueled by credit expansion. 

     "We continue to see credit growth at a pace that is above income growth,

and we believe that this is going to thin the liquidity cushion that

policy-makers have enjoyed so far when they deal with all kinds of financial

risks," he said.  

     "Underlying the otherwise healthy picture, credit risks are rising and

liquidity risks are rising," he said, although he added that "things do look to

be relatively positive in the short term."

     China's overall debt-to-GDP ratio has been variously estimated at 230% to

270%. The International Monetary Fund said in August that China's total domestic

nonfinancial credit-to-GDP ratio was "about 230%" in 2016, and that those debts

are expected to rise to almost 300% by 2022. 

     Although China itself is aiming for GDP growth of 6.5% this year, growth

popped 6.9% during the first half, prompting the IMF to revise up its economic

growth outlook for China this year by 0.1 percentage point to 6.7% and up 0.2

percentage point for 2018 to 6.4%, pointing to the Chinese government's "policy

easing and supply-side reforms" and singling out its effort to reduce excess

capacity in industrial sectors like steel and coal.

     Tan noted a number of "big actions" coming from China's government that had

had a positive impact on debt levels, including the closure of state-owned

enterprises reliant on a continual rollover of debts, and the government's

"becoming serious about tackling off-budget borrowing by local governments" and

punishing local-level officials responsible for financial misdeeds.

     In addition, Tan said, growth in corporate debt has settled into the single

digits, at around 9%, a level that S&P expects will come down even further.

However, Tan said, deleveraging in the corporate sector "is likely to be much

more gradual than we thought could have been the case earlier this year," and

was a main reason behind the ratings downgrade. 

     Tan also said he did not think the ratings downgrade would be a negative

factor for foreign investment flows into China's bond market. "Flows into the

bond market are more likely to be determined by the policy stance' of China's

government," he said.

     The S&P downgrades followed a similar move by Moody's Investors Service in

May, when it lowered China's long-term ratings by a notch and changed its rating

outlook on China from "stable" to "negative," while also citing the country's

rising debt levels. It was the first China downgrade by Moody's in nearly 30

years.

     China's Finance Ministry criticized the Moody's move at the time as being

based on "inappropriate methodology."

     S&P on Friday also cut Hong Kong's credit rating, a move it said reflected

the "strong institutional and political linkages" between China and its special

administrative region (S.A.R.)

     Hong Kong's long-term issuer credit rating was lowered to AA+ from AAA, S&P

said in a statement and at the press conference.

     "We are lowering the rating on Hong Kong to reflect potential spillover

risks to the S.A.R. should deleveraging in China prove to be more disruptive

than we currently expect," S&P said.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com