S&P says lowered China as credit growth still too fast

BEIJING: China’s attempts to reduce risks from its rapid buildup in debt are not working as quickly as expected and credit growth is still too fast, S&P Global Ratings said on Friday, a day after it downgraded the country’s sovereign credit rating. While S&P warned months ago that a cut may be on the cards, it said it decided to make the call after concluding that China’s “de-risking” drive that started early this year was having less of an impact on credit growth than initially expected.
“Despite the fact that the government has shown greater resolve to implement the deleveraging policy, we continue to see overall credit in the corporate sector to stay at a 9 per cent point”, Kim Eng Tan, an S&P senior director of sovereign ratings, said in a conference call to discuss the one-notch downgrade to A+ from AA-.
“We’ve now come to the conclusion that while we do expect some deleveraging in the next few years, this deleveraging is likely to be much more gradual than we thought could have been the case early this year.”
Tan said broader lending by all financial institutions, excluding equity fund-raising, has started to rise after growing by a relatively steady 12-13 per cent in the last few years.
“That was the key metric that we look at in terms of assessing credit growth and we believe while this growth of aggregate debt financing could come down somewhat over the next few years, it’s not likely to come down very sharply.”
Indeed, China’s new bank lending and total social financing (TSF), a broad measure of credit and liquidity in the economy, look set to hit record highs again this year.
China’s banks extended a record 12.65 trillion yuan ($1.84 trillion) of loans in 2016, roughly the size of Italy’s economy. TSF was a record 17.8 trillion yuan ($2.70 trillion).
“One of the things that we do look for is more than just stablisation of financial risks, but actual decline or moderation in financial risks,” Tan said.
If China’s ratio of credit-to-income growth falls sharply in coming years and the economy remains healthy, S&P would consider raising its rating, he added.
S&P’s move put its rating in line with those of Moody’s and Fitch, though the timing raised eyebrows as it came just weeks ahead of one of the country’s most politically sensitive events, the twice-a-decade Communist Party Congress (CPC).
China’s finance ministry said on Friday the downgrade was “a wrong decision” that ignored the economic fundamentals and development potential of the world’s second-largest economy. — Reuters