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S&P Downgrades China’s Credit Outlook Rating To Negative

Standard and Poor'sRating firm S&P has cut its outlook for China’s sovereign credit rating from stable to negative but has retained the rating on its sovereign debt at AA- , making it the second rating company to have lowered its optimism on China’s economy. Moody’s Investor Services in early March reduced its rating to negative for China’s economy.

S&P has cited slow progress of the government’s reform program as the main reason behind its decision to reducing its outlook rating. It took a similar decision on Hong Kong, which is a special administrative zone of China, retaining the rating of AAA but downgrading its outlook to negative.

In a statement, S&P said,

Our outlook revision on Hong Kong reflects our similar action on the People’s Republic of China…which reflected economic imbalances in China that are unlikely to diminish at the pace we previously expected

The Hong Kong government responded to the rating downgrade saying that it disagreed with the assessment and that Hong Kong was well-positioned to benefit from the structural change in mainland China by virtue of having a service-led economy.

The Chinese government is yet to comment on the matter, but is unlikely to welcome the rating. Officials had criticized the downgrade by Moody Investor Service’s saying it was unwarranted. However market analysts have said that the move was not unexpected given the worries arising from slow growth and high levels of bad debt in the country.

Sanjiv Shah, CIO at Sun Global Investments said that even with the cut the rating was still better than those of other emerging market economies. A strategist from First Shanghai Securities Ltd in Hong Kong Linus Yip said that the logic behind S&P‘s decision needed to be studied before understanding its implications.

The Chinese government has been trying to influence the tone of conversations around its economy in order to minimize the spread of negative sentiment as it is likely to increase the outflow of capital.

China registered its lowest growth in 25 years last year at 6.9 percent causing widespread concern. Weakened demand and performance across industry sectors in China have persisted through this year as well, raising questions on Beijing’s ability to deliver on the reform agenda including reducing bad debts, managing overcapacity and driving the shift in its economy towards domestic consumption away from exports.

Chinese stock markets have stabilized to some extent after facing severe volatility early this year but capital has been exiting the country at an unprecedented rate, including a drastic drop in its forex reserves underscoring deepening worries about the economy’s stability.

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