S&P dings China over rising debts

The Standard & Poor’s rating agency cut China’s credit rating Thursday because of its rising debts, highlighting challenges faced by the country’s leaders as they cope with slowing economic growth.

The downgrade added to mounting warnings about the dangers of increasing Chinese debt, which has fueled fears of a banking crisis or a drag on economic growth. Moody’s Investors Service cut its rating for China in May.

S&P lowered its rating on China’s sovereign debt by one notch from AA- to A+, still among its highest ratings. The agency had given a warning sign of a possible downgrade in March 2016 when it changed China’s outlook to negative.

“A prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said. “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.”

The ratings cut, announced after Chinese financial markets closed for the day, could raise Beijing’s borrowing costs slightly, but the more significant impact is on investor sentiment.

Phone calls to the Chinese Finance Ministry were not answered. After the Moody’s downgrade in May, the ministry said the agency had used improper methods and misunderstood China’s economic difficulties and financial strength.

The country’s leaders have cited reducing financial risk as a priority this year. They have launched initiatives to reduce debts owed by state companies, including by allowing banks to accept stock as repayment on loans. But private-sector analysts say they are moving too slowly.

Beijing relied on repeated infusions of credit to prop up growth after the 2008 global financial crisis.

That helped propel total non-government debt to the equivalent of 257% of annual economic output by the end of last year, according to the Bank for International Settlements. That is unusually high for a developing country and up from 143% in 2008.

Chinese economic growth fell from 14.2% in 2007 to 6.7% last year, though that still was among the world’s strongest.

S&P kept its outlook for China stable. It said that reflected expectations the country will “maintain robust economic performance over the next three to four years.”