S&P down­grade of China’s credit rat­ing ‘a wrong de­ci­sion’

Ne­glects fi­nanc­ing struc­ture char­ac­ter­is­tics

Global Times - Weekend - - TOPNEWS - By Ma Jingjing and Xie Jun Page Ed­i­tor: yang­sheng@glob­al­times.com.cn

China said on Fri­day in­ter­na­tional credit rat­ing agency S&P Global Rat­ings “made a wrong de­ci­sion” in down­grad­ing China’s credit rat­ing, say­ing the firm ne­glected the char­ac­ter­is­tics of the coun­try’s fi­nanc­ing struc­ture and un­der­es­ti­mated the coun­try’s eco­nomic po­ten­tial.

The firm’s con­cerns over prob­lems like China’s hy­per-fast credit growth are not rare for the cur­rent stage of its eco­nomic de­vel­op­ment, which, how­ever, ne­glect the char­ac­ter­is­tics of the coun­try’s fi­nanc­ing struc­ture as well as the wealth ac­cu­mu­la­tion and ma­te­rial ba­sis for gov­ern­ment ex­penses, the Min­istry of Fi­nance (MOF) said in a state­ment.

Re­gret­tably, S&P’s de­ci­sion is a re­sult of in­ter­na­tional rat­ing agen­cies’ con­ven­tional think­ing and mis­in­ter­pre­ta­tion of China’s econ­omy based on de­vel­oped coun­tries’ ex­pe­ri­ence, the MOF said, not­ing this mis­in­ter­pre­ta­tion also re­flects their ig­no­rance of China’s sound eco­nomic fun­da­men­tals and de­vel­op­ment po­ten­tial.

The MOF’s re­ac­tion comes af­ter S&P Global Rat­ings low­ered China’s long-term sov­er­eign credit rat­ings by one notch to A+ from AA-, the first time since 1999, out of con­cerns of in­creas­ing eco­nomic and fi­nan­cial risks from ris­ing debt. The rat­ings out­look is sta­ble, it said.

“The down­grade re­flects our as­sess­ment that a pro­longed pe­riod of strong credit growth has in­creased China’s eco­nomic and fi­nan­cial risks,” S&P said in a state­ment re­leased on Thurs­day.

Given China’s high sav­ings rate back­ing its in­di­rect fi­nanc­ing-ori­ented fi­nan­cial sys­tem and bank­ing loans’ lead­ing role in social fund­ing, the na­tion is com­pletely ca­pa­ble of main­tain­ing a sta­ble fi­nan­cial sys­tem if the reg­u­la­tors ef­fec­tively con­tain credit risks by pru­dent lend­ing and tight­en­ing reg­u­la­tion, the MOF said.

China has ad­hered to a sta­ble mon­e­tary pol­icy in re­cent years, and hasn’t flooded its econ­omy with strong stim­u­lus mea­sures, the MOF con­tin­ued.

The coun­try’s cur­rency growth is grad­u­ally de­clin­ing. In Au­gust, M2, a broad mea­sure of money sup­ply that cov­ers cash in cir­cu­la­tion and all de­posits, rose 8.9 per­cent from a year ear­lier, far be­low the av­er­age growth rate since the 2008 global fi­nan­cial cri­sis.

Mean­while, the cen­tral gov­ern­ment has made ef­forts to con­tain fi­nan­cial risks, reg­u­late wealth man­age­ment busi­ness and crack down on shadow bank­ing, which have helped guar­an­tee the sta­bil­ity of the do­mes­tic fi­nan­cial sys­tem and sus­tain­abil­ity in serv­ing the real econ­omy, ac­cord­ing to the MOF.

Liu Xuezhi, a se­nior an­a­lyst at Bank of Com­mu­ni­ca­tions, also told the Global Times on Fri­day that the S&P’s as­sump­tion that China’s fi­nan­cial risks are ac­cu­mu­lat­ing be­cause of in­creas­ing credit is ground­less.

“Grow­ing credit doesn’t nec­es­sar­ily mean that the fi­nan­cial risks must in­crease as well. If the econ­omy is healthy and that com­pa­nies have the ca­pac­ity to re­pay their debt, then there’s noth­ing wrong with banks lend­ing money,” Liu noted.

Liu said China’s fi­nan­cial sta­tus is very sta­ble. Ma­jor com­mer­cial banks had a cap­i­tal ad­e­quacy ra­tio of 13.2 per­cent by the end of June, up from 10.75 per­cent at the end 2016.

Liu added that the gov­ern­ment has delever­aged the fi­nan­cial sec­tor, and those ef­forts have had a sig­nif­i­cant im­pact.

“For ex­am­ple, the real estate bub­ble has shrunk as a re­sult of gov­ern­ment poli­cies,” Liu said.

De­spite the credit prob­lem, S&P still noted that China’s eco­nomic growth will re­main strong at close to 5.8 per­cent or more an­nu­ally through at least 2020, but the firm ex­pected credit growth in China to out­pace that of nom­i­nal GDP over much of this pe­riod.

The MOF said China’s econ­omy has main­tained a trend of sta­bil­ity, while also show­ing signs of im­prove­ment.

Ac­cord­ing to the MOF state­ment, China saw GDP growth of 6.9 per­cent in the first six months of this year, higher than the goal that had been set by the gov­ern­ment. Also, China has had a medium to high eco­nomic growth rate for eight quar­ters in a row.

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