Standard & Poor’s is likely to follow its regular ratings review schedule for China and does not see any basis at this point for an out-of-schedule committee meeting, a senior director at the ratings agency told Reuters on Monday. Moody’s Investors Service last week cut its sovereign ratings on China by a notch, putting them on par with those of Fitch Ratings. That put S&P one step above the two agencies, holding an AA- rating with a negative outlook that it has maintained since March 2016.
“I don’t think there has been anything that could justify the calling of an out-of-schedule committee at this point in time, so we are likely to follow our regular review pattern,” Kim Eng Tan, S&P’s Asia-Pacific senior director of sovereign ratings, said in a phone interview. Tan declined to say when the next regular review would be.
Moody’s cut China’s sovereign ratings to A1, saying it expects the financial strength of the world’s second-largest economy to erode in coming years as growth slows and debt continues to mount. Fitch on Friday maintained its A+ rating on China, citing its “strong macroeconomic track record”, though the agency also noted an accompanying build-up of imbalances and vulnerabilities.
But nobody is expecting any form of financial instability anytime in the near future, Tan told Reuters. “Despite the (Moody’s) downgrade, all the major agencies have really high ratings on China, whether it’s A+ or AA-, they are both high ratings,” he said.
Government-led stimulus has been a key driver of China’s economic growth in recent years. But that has been accompanied by credit growth that has created a mountain of debt – now at nearly 300 percent of gross domestic product (GDP).
“The key concerns that people have are longer term,” Tan said. “Because if trends carry on as they do, from what we have seen in the past few years, then at some point in time, the risk of instability will rise to a level that will probably justify a further downgrade in the ratings.” S&P last changed its rating on China in late 2010, when it upgraded it by one notch.
FLURRY OF MEASURES
China has vowed to lower debt levels by rolling out steps such as debt-to-equity swaps, reforming state-owned enterprises (SOEs) and reducing excess industrial capacity. In recent months, regulators have issued a flurry of measures to clamp down on the shadow banking sector while the central bank has gingerly raised short-term interest rates.
Tan said the key concern is that China “is relying on a source of growth which hasn’t been sustainable in some other economies and also the fact its debt is rising fast.” “If one day growth slows and there’s a whole pile of debt to be paid, then obviously the stresses are going to be large. But I don’t think that day is anytime soon.”
Tan said he expects China’s annual economic growth to slow to 6 percent in the next few years, but still hold above 6 percent for much of the next one to two years. Moody’s expects GDP growth to slow to around 5 percent in coming years, but says the economy will remain robust and the likelihood of a hard landing is slim.
The Chinese government is targeting GDP growth of around 6.5 percent this year. The economy expanded 6.7 percent in 2016, within the government’s expectations, though the pace was the slowest in a quarter of a century. The probability of a ratings cut by S&P cannot be ruled out after the Moody’s downgrade, OCBC wrote in a note to clients on Monday.
But the Singapore bank said China’s credit risks could be well-contained in the near term by the latest wave of new regulations for de-leveraging. S&P’s Tan said: “What could determine whether or not we actually do a downgrade depends on firstly the trend of credit growth and the trend of economic growth, as well as the composition of the drivers of growth.
“And secondly, how much we think the policy changes that we have seen over the past half a year or so are likely to lead to better trends for both the type of growth we are seeing, as well as the strength of credit growth.”