China Not Happy With S&P’s Downgrade Of Credit Rating

Global Ratings firm Standard & Poor (S&P) announced on Sep 21 that it had downgraded China’s sovereign rating for the first time since 1999 due to increased financial risks and growing debt.

The ratings firm stated that China’s economy could slow down due to the rising debt and its financial system could be shaken going forward. S&P became the second ratings firm to downgrade China’s rating after Moody's Investors Service downgraded China’s rating in May 2017.

S&P also decided to downgrade Hong Kong’s rating on Sep 22 bringing it from an AAA to AA over the fact that Hong Kong could also suffer from China’s slowdown.

S&P did take the time to highlight that Hong Kong did have a creditable monetary policy, strong fiscal reserves and a positive economic outlook but China’s downgrade had to reflect on Hong Kong’s rating due to the fact that both parties had close political and institutional ties.

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China’s sovereign credit rating downgrade does not come at a great time for President Xi Jinping as he is currently preparing for the twice a decade meeting with key executives from the Community Party. The meeting is scheduled to take place on October 18 and the President is expected to be reelected for another 5 year term in office.

The Chinese President has made it one of his key priorities in 2017 to reduce the risk of debt in China and to stop the outflow of capital. The credit rating downgrades does not speak much for these efforts, even though official data shows that government revenue this year has increased by 10 percent while the economy has grown by 6.9 percent in the last 9 months.

The Finance Ministry objected to Moody's Investors Service’s downgrade in May and also voiced their disapproval for S&P’s downgrade. The Finance Ministry responded to the downgrade by posting a statement on its website which read

The Standard & Poor's downgrade of China's sovereign credit rating is a wrong decision. This misreading neglects China's good fundamentals and development potential

The Ministry also stated that S&P’s decision to downgrade the country’s credit rating was baffling because the economy is robust and the government was very capable in ensuring China’s financial stability. The Chinese government is expected to continue to focus on issues like credit risk, capital outflow and overall financial supervision in the country.

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