China’s attempts to reduce risks from its rapid buildup in debt are not working as quickly as expected and credit growth is still too fast, S&P Global Ratings said on Friday, a day after it downgraded the country’s sovereign credit rating.
While S&P warned in June that a cut may be on the cards, it said it decided to make the call after concluding that China’s “de-risking” drive that started early this year was having less of an impact on credit growth than initially expected.
“Despite the fact that the government has shown greater resolve to implement the deleveraging policy, we continue to see overall credit in the corporate sector to stay at a 9 percent point,” Kim Eng Tan, an S&P senior director of sovereign ratings, said in a conference call to discuss the one-notch downgrade to A+ from AA-.
“We’ve now come to the conclusion that while we do expect some deleveraging in the next few years, this is likely to be much more gradual than we thought could have been the case early this year.”
China’s finance ministry said the downgrade was “a wrong decision” that ignored the economic fundamentals and development potential of the world’s second-largest economy.
“China is able to maintain the stability of its financial systems through cautious lending, improved government supervision and credit risk controls,” it said on its website.
S&P’s move put its rating in line with those of Moody’s and Fitch, though the timing raised eyebrows as it came just weeks ahead of one of the country’s most politically sensitive events, the twice-a-decade Communist Party Congress (CPC).
S&P does not have a set schedule to review China’s credit ratings, Tan said.
“As part of our ongoing surveillance we do meet with the government and have calls with them. All these were done in the past few months,” he told Reuters by phone later on Friday.
But S&P is obliged to make a call “when the data points to one direction or another”, Tan said.
“Unfortunately it comes close to the Congress.”
KEY DEBT MEASUREMENT
Tan said broader lending by all financial institutions, excluding equity fund-raising, has started to rise after growing by a steady 12-13 percent in the last few years.
“That was the key metric we look at…we believe while this growth of aggregate debt financing could come down somewhat over the next few years, it’s not likely to come down very sharply.”
Indeed, China’s new bank lending and total social financing (TSF), a broad measure of credit and liquidity in the economy, look set to hit record highs again this year.
“One of the things that we do look for is more than just stabilization of financial risks, but actual decline or moderation in financial risks,” Tan said.
To be sure, China’s economic growth has unexpectedly accelerated this year, racing ahead at 6.9 percent in the first half, but much of the impetus has come from record bank lending in 2016, a property boom and sharply higher government stimulus in the form of an infrastructure spending spree.
While the crackdown on riskier lending has pushed up borrowing costs from corporate loans to mortgages, it has not yet dampened growth as many China watchers predicted.
The head of a government research institute said on Friday that China’s rising debt is not a big concern since it funds infrastructure and urban development, which support future economic growth.
“China’s debt sustainability is different form Western countries and other developing countries…if you just look at the size of debt, the debt-to-GDP ratio, and reach a conclusion on the credit rating, it’s very one-sided,” Liu Shangxi, head of the Chinese Academy of Fiscal Sciences under the Ministry of Finance, told a news conference.
But 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 percent of its gross domestic product (GDP) by 2022, up from 242 percent last year.
The IMF and others have called on China to drop its focus on growth targets, which add pressure to take on more debt.
“From our perspective, as long as any growth target cannot be obtained without very strong credit growth, that is something that will weaken the credit support for the government,” S&P’s Tan told Reuters.
DEBT BATTLE HAS MIXED SUCCESS SO FAR
Analysts say China’s campaign to cut financial risks this year has had mixed success so far, and opinions differ widely on whether Beijing is moving fast enough, or decisively enough, to avert a debt crisis down the road.
Regulators appear to be making significant inroads in reducing interbank borrowing – perhaps the most pressing risk – and have curbed some riskier types of shadow banking.
But analysts agree more comprehensive structural reforms are needed. Though the pace of credit growth may be easing by some measures, it continues to outpace economic growth.
Moreover, a recent Reuters analysis showed corporate debt is growing faster than last year, with few companies using stronger profits to reduce debt.
“There has actually been some progress recently in tackling credit risks, particularly in reining in the activities of the ‘shadow’ banking sector (and) broad credit growth has slowed,” Capital Economics said in a research note.
“But it continues to rise relative to GDP so the overall trend remains deeply unhealthy.”
Source: Reuters (Reporting by Yawen Chen, Stella Qiu, Elias Glenn and Ryan Woo; Additional reporting by Kevin Yao; Writing by Se Young Lee; Editing by Kim Coghill)