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S&P: Future China Ratings Changes Depend on Government Moves

--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
     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
     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:
--MNI BEIJING Bureau; +1 202-371-2121; email:
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