China fires back over ‘flawed’ S&P credit rating downgrade

China’s Finance Ministry has said S&P’s downgrade of its credit rating is a result of “cliched” thinking.

Chinese people walk by a construction site in the Central Business District in Beijing. (AP Photo/Andy Wong)

China’s Finance Ministry has criticised Standard & Poor’s downgrade of the country’s sovereign credit rating as “perplexing.”

It said the downgrade focused on credit growth and debt, but ignored China’s distinctive financing structure, the wealth-creating effect of government spending and its support for growth, in addition to its sound economic fundamentals and development potential.

Xinhua News Agency pointed out that the financial markets were muted in their response to the downgrade, with the benchmark Shanghai Composite Index edging down on Friday, after S&P’s announcement, by an “unexceptional” 0.16 per cent to 3,352.53.

The decision to lower the rating from AA- to A+ was a result, the ministry said, of “international rating agencies’ longstanding mode of thinking, and a misreading of the Chinese economy based on developed countries’ experiences.”

It said that S&P’s thinking was a “cliche.”

The agency believes that “credit growth in the next two to three years will remain at levels that will increase financial risks gradually,” even though the government has been acting to constrain borrowings.

It said that if China allows credit growth to accelerate to support economic growth, this would “weaken the Chinese economy’s resilience to shocks, limit the government’s policy options, and increase the likelihood of a sharper decline in the trend growth rate” — resulting in a further rating downgrade.

The Finance Ministry responded, however, that China would maintain financial stability by remaining prudent with lending, tightening supervision and controlling risk. Stable and relatively fast growth would be maintained, it said, with credit kept at a reasonable level.

It added that credit growth is decelerating: “At the end of August, M2 — cash in circulation plus deposits — was up 8.9 per cent from the same time in 2016, but the pace of growth was down for the seventh straight month.

The ministry said that local government debt issues would be addressed through continued fiscal reform, and that the debt of local government financing vehicles would be paid off by the companies themselves, and that governments would not be liable.

Xinhua quoted Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, as saying that the commonly used debt analysis framework was flawed, since it ignored how debt was used.

He said that the majority of China’s debt went on public facilities and infrastructure, which provide impetus for growth.

The downgrade, he said, is a reminder of deficiencies in the economy and the need for reform, but not a reflection of credit risk or economic fundamentals.

Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia, who is today viewed in Beijing as a strong supporter of China, described the downgrade as “a belated recognition of a serious problem that China has already begun to address.”

He said that China’s central bank, the China Banking Regulatory Commission, and the State Council or Cabinet, had all taken explicit actions this year to reduce the expansion of debt, especially the mounting indebtedness of state-owned enterprises.

Mr Roach said: “A high-saving Chinese economy mainly owes debt to itself — very different than classic debt crises triggered by an outflow of foreign investors who were investing their surplus savings in China.”

As long as China continues to emphasise financial stability, he said — and takes actions aimed at promoting it — “the threat to growth and development should not be serious.”