Asset Management Association of China cancelled the licenses of over 10,000 funds. - AFP pic
KUALA LUMPUR: S&P Global Ratings has lowered the long-term sovereign credit ratings on China as a prolonged period of strong credit growth has increased China's economic and financial risks.
The ratings agency said on Thursday it had lowered the ratings 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-',” it said.
The downgrade reflects the 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 non-government 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,” it said.
"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."
S&P notes that the ratings on China reflect its view of the government's reform agenda, growth prospects, and strong external metrics.
It notes the below initiatives and developments:
* The Chinese government is bolstering its economic and fiscal resilience, ie an anti-corruption campaign to improve governance.
* The government continues to make significant reforms to its budgetary framework and the financial sector, including allowing SOEs with lesser policy importance to exit the market for better resource allocation.
* China's policymaking has helped it to maintain consistently strong economic performances since the late 1970s. However, coordination and communication issues to implement policy and convey information. The absence of free flow information also serves to inhibit checks and balances.
* 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.
*China's external profile remains a key credit strength despite the recent decline of its foreign exchange reserves.
* 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.Total external assets will exceed its external liabilities by 65% of its CAR.
* The increasing global use of the renminbi (RMB) also bolsters China's external financial resilience.
* We expect the share of renminbi-denominated official reserves to rise over time. Based on estimates from the BIS, the real effective exchange rate has appreciated by close to 10% since the end of 2011.
* China is gradually implementing an ambitious fiscal reform to improve fiscal transparency, budgetary planning and execution, and subnational debt management.
*In 2017-2020, we expect the Chinese government to keep the reported general government deficit close to, or below, 2.5% of GDP.
*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.
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