China’s debt downgraded by second ratings agency

Beijing: Standard & Poor´s slashed China´s credit rating on Thursday over warnings that its ballooning debt had raised "economic and financial risks", marking the country´s second downgrade this year.

The decision by S&P, which downgraded China´s debt from AA-minus to A-plus, follows a similar decision in May by Moody´s, which had also raised concerns about the growing debt of the world´s second largest economy.

"The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China´s economic and financial risks," New York-based S&P said in a statement.

While the credit growth has fuelled China´s economic expansion and high asset prices in recent years, "we believe it has also diminished financial stability to some extent", the agency said.

Debt-fuelled investment in infrastructure and property has underpinned China´s rapid growth, but there are widespread concerns that years of freewheeling credit could lead to a financial crisis with global implications.

Beijing has been clamping down on bank lending and property purchases, but those efforts are complicated by the government´s determination to meet its full-year growth target of around 6.5 percent.

That compares with last year´s pace of 6.7 percent, which was the slowest in around a quarter of a century.

Premier Li Keqiang said in June that China could meet its target. "The recent intensification of government efforts to rein in corporate leverage could stabilise the trend of financial risk in the medium term," S&P said. "However, we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually."

Mark Williams, chief China economist at Capital Economics, said S&P´s decision "won´t be news to anyone who has kept half an eye on China over recent years and shouldn´t change anyone´s thinking. S&P is playing catch-up." However, Williams said, the downgrade was "arguably questionable on the basis of recent economic and financial development."

With credit growth now slowing and the latest tightening of liquidity appearing to have peaked, "the immediate risk of some form of credit event is probably lower now than a few quarters ago," he said.