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S&P downgrades China, says rising debt is stoking economic, financial risks

S&P’s one-notch downgrade to A+ from AA- comes as Beijing grapples with the challenges of containing financial risks

Gulf News

Beijing, Shanghai, London

S&P Global Ratings downgraded China’s long-term sovereign credit rating on Thursday, less than a month ahead of one of the country’s most sensitive political gatherings, citing increasing risks from its rapid build-up of debt.

S&P’s one-notch downgrade to A+ from AA- comes as Beijing grapples with the challenges of containing financial risks stemming from years of credit-fuelled stimulus to meet ambitious government economic growth targets.

“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said in a statement, adding that the ratings outlook was stable.

S&P had said in June there was a “real” chance of a downgrade and a decision would be made based on whether China is able to move away from a credit-driven growth strategy. The demotion follows a similar move by Moody’s Investors Service in May.

While S&P’s move put its China ratings on par with those of Moody’s and Fitch, the timing raised eyebrows just weeks ahead of a twice-a-decade Communist Party Congress (CPC), which will see a key leadership reshuffle and the setting of policy priorities for the next five years.

“The downgrade is a timely reminder for the authorities that China needs to bite the bullet on some of the more painful reforms that have been left to last, namely corporate deleveraging and restructuring of state-owned companies,” said Rob Subbaraman, an economist at Nomura in Singapore.

“The focus needs to shift from quantity to quality of growth. I hope that later this year China lowers its GDP growth target to 6 per cent to 6.5 per cent, or not have one at all. That would be a positive sign.” The International Monetary Fund warned this year that China’s credit growth was on a “dangerous trajectory” and called for “decisive action”, while the Bank for International Settlements said last September that excessive credit growth was signalling a banking crisis in the next three years.

The IMF said in August it expected China’s total non-financial sector debt to rise to almost 300 per cent by 2022, up from 242 per cent last year.

Chinese banks told to stop doing business with North Korea

China’s central bank has told banks to strictly implement United Nations sanctions against North Korea, four sources told Reuters, amid US concerns that Beijing has not been tough enough over Pyongyang’s repeated nuclear tests.

Tensions between the United States and North Korea have ratcheted up after the sixth and most powerful nuclear test conducted by Pyongyang on Sept. 3 prompted the United Nations Security Council to impose further sanctions last week.

Chinese banks have come under scrutiny for their role as a conduit for funds flowing to and from China’s increasingly isolated neighbour.

The sources said banks were told to stop providing financial services to new North Korean customers and to wind down loans with existing customers, following tighter sanctions against Pyongyang by the United Nations.

The sources said lenders were asked to fully implement United Nations sanctions against North Korea and were warned of the economic losses and reputation risks if they did not do so. Chinese banks received the document on Monday, the sources said. China’s central bank did not immediately respond to a request for comment.

-Reuters

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