Surging Chinese debt levels prompt S&P Global Ratings to downgrade sovereign credit

Jasper Jolly
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Chinese growth has been boosted by a credit boom (Source: Getty)

Rising debt levels in China have prompted S&P Global Ratings to become the latest major credit rating agency to downgrade the country’s sovereign debt.

The agency lowered its rating to “A+/A-1” from “AA-/A-1+”, it said in a statement released today.

The strong growth of the Chinese economy, driven by a huge build-up of debt, has increased “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 agency added.

Read more: No need to worry about China's debt bubble...yet

Influential economists and agencies have been queuing up in recent months to warn the rise in debt is unsustainable, with the International Monetary Fund and the Bank for International Settlements among the most prominent voices.

The Chinese government and its central bank have tried to force state-backed firms to rein in their use of leverage in recent months, although some analysts believe a stronger effort may come after next month’s Communist party congress, at which the country’s economic leaders for the next five years will be decided.

The rating could rise again if a fall in debt levels is accompanied by continued fast growth, S&P added, although any sign of further easing of restrictions on credit would be negative.

Today’s downgrade was widely anticipated after rival agency Moody’s cut its China rating in May. It is the first movement in the nation’s rating since 2010, when it was moved up a notch.

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While the downgrade means China still retains an “investment-grade” rating, the size of China’s debt remains an important concern for both Chinese policymakers and other economies around the world.

Helena Huang, China economist at ICBC Standard Bank, said: “Without any near term credit risks amid Beijing’s recent regulatory tightening and de-leveraging efforts, the key uncertainty still rests in the longer term on Beijing’s capability to resolve its debt conundrum.”

The downgrade could have a knock-on effect on Chinese firms; state-owned enterprises, whose massive debt piles have grown with the implicit backing of the Chinese government, could face particular pressure on their ratings, and therefore ease of financing in international capital markets, Huang added.

Read more: IMF: China credit boom could lead to "crisis" without decisive action

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