MARKET BUZZ: S&P China Downgrade To Have Limited Impact - Nomura

Lester Mason
September 23, 2017

While that view is shifting as the authorities allow more defaults, China's credits offer a significant premium for exposure to the world's second-largest economy and consumer market.

While the downgrade "won't be news to anyone who has kept half an eye on China over recent years and shouldn't change anyone's thinking", Williams noted that it served as a reminder that "state sector reforms have continued to disappoint and so the hidden risks on bank balance sheets have continued to build".

The downgrade of China's rating, the first such move by S&P since 1999, reflects its assessment that "a prolonged period of strong credit growth has increased China's economic and financial risks", it said in its statement.

Fitch, the third member of the triumvirate of global credit agencies, last cut China's sovereign rating four years ago.

"Although this credit growth had contributed to strong real GDP [gross domestic product] growth and higher asset prices, we believe it has also diminished financial stability to some extent", it said. Fiscal spending rose 13.1 percent for January-August, providing strong support for stable growth and economic restructuring, the MOF said. Trump's administration said it would punish foreign companies dealing with the North, including by expanding the Treasury Department's ability to ban anyone from interacting with the US financial system.

S&P lowered its rating on China's sovereign debt by one notch from AA- to A+, still among its highest ratings. In the short term, China is unlikely to experience another downgrade.

The move added to warnings China's debt burden might drag on economic growth or threaten the financial system.

"We expect Chinese policymakers to continue to push forward with structural reforms".

China has always been a major growth engine for the rest of the world. Indebted local governments have been borrowing heavily as well. "They did not notice the problem when it occurs, but begin to pay attention when it is gradually digested and solved".

While S&P warned months ago that a cut may be on the cards, it said it chose to make the call after concluding that China's "de-risking" drive that started early this year was having less of an impact on credit growth than initially expected. Over time, it said, this could improve the private sector business environment.

Other reports by Iphone Fresh

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