China has been told to get a move on with economic reforms if it wants to maintain its top-notch credit rating today, after Standard & Poor’s (S&P) warned that its economic rebalancing is taking too long.
The ratings agency said it was downgrading its outlook for China’s sovereign debt from “stable” to “negative”, firing a warning shot to the Chinese leadership to give market forces a bigger say over the direction of the economy or face higher borrowing costs.
Political interference with China’s legion of nationalised firms, so-called state-owned enterprises, and fears of a debt crisis were singled out as the biggest reasons behind the downgrade, which heaps pressure on China’s ‘AA-’ rating - the fourth highest available.
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S&P said it will follow through with its threat if debt continues to grow at a faster rate than the wider economy. The value of all outstanding loans to the private sector, excluding banks, stood at 249 per cent of China’s GDP in September 2015, according to the Bank for International Settlements, up from around 150 per cent before the financial crisis.
Concerns were also raised over excessive levels of investment in China. Despite “modest progress”, in gearing its economy more towards consumption over recent years, investment is set to remain “well above what [S&P] believes to be sustainable levels” of more than 40 per cent of GDP for the rest of the decade.
In the US, UK and Germany, investment makes up less than twenty per cent of national output.
S&P has called specifically for China to focus on creating “better transparency, improved information availability, deeper liberalisation of the financial market, and greater official use of renminbi for reserve management”.