Beijing calls rating a ‘wrong decision’
China’s Ministry of Finance on Friday rebutted S&P Global Ratings’ decision to downgrade the country’s sovereign credit rating, saying it was “a wrong decision” that neglects the nation’s economic fundamentals and development potential.
Analysts said the agency’s methodology in rating China is fundamentally flawed as it neglected the country’s strong capability for debt repayment.
The Standard & Poor’s agency on Thursday cut China’s long-term sovereign rating by one notch to A+ from AA-, citing its increasing debt risks. The finance ministry said in a statement that the decision was “perplexing” as it came while China’s economy has been on a firm growth track following its achievement of higher-than-expected growth rates in the first half of this year and solid progress in economic restructuring and debt cuts.
“S&P is behind the curve,” said Liang Hong, chief economist of the China International Capital Corp. Unlike in previous years, when China’s growth declined continually, the country’s economic fundamentals have significantly improved in the past two quarters, international organizations have gradually raised their forecasts of China’s growth, and the renminbi has been surprisingly strong this year. The S&P’s downgrade does not match China’s current economic development, she said.
The finance ministry said it was a pity for S&P to focus on China’s fast debt growth while ignoring the country’s distinctive financing structure and the growth-boosting effect of government spending.
Chinese companies have mainly borrowed from banks instead of directly financing from the stock market due to the immaturity of the capital market, a practice that has pushed up the country’s nominal general debt levels.
Meanwhile, the government’s debts have been mainly used to promote growthboosting activities, such as building infrastructure, in stark contrast to borrowing for consumption, as is widely seen in Western economies.
China’s debt repayment ability has been ensured, which precludes serious debt risks, said Liu Shangxi, president of the Chinese Academy of Fiscal Sciences. “Simply focusing on the scale of debts and ignoring how the borrowed funds have been used, the S&P has gone awry in the downgrade; its rationale is not solid.”
“The downgrade is a result of the international rating agency’s long-standing mode of thinking, and misreading of the Chinese economy based on developed countries’ experience,” the Ministry of Finance statement said.
CICC’s Liang said China has a very high savings rate — about 47 percent of its GDP, much higher than that of Japan and Singapore, renowned for high savings rates. “There’s no problem at all for China to repay its debts,” she said.
“China has a unique situation and other countries’ experiences cannot be simply applied to China,” said Zhu Min, economist and former deputy managing director of the International Monetary Fund. “China does not face the menace of systemic financial risks.”