March 31, 2016 / 2:11 PM / in 2 years

S&P cuts China sovereign credit outlook to negative; maintains AA- rating

SHANGHAI/HONG KONG (Reuters) - S&P cut its outlook for China’s sovereign credit rating on Thursday to negative from stable, but maintained the rating at AA-, saying the government’s reform agenda is on track but likely to proceed more slowly than expected.

The sun sets above residential buildings on a hazy day in Beijing, September 20, 2014. REUTERS/Barry Huang

The downgrade for China’s outlook follows a similar move by ratings agency Moody’s Investor Services in early March.

At the same time, S&P also downgraded the outlook for Hong Kong, a special administrative zone of China, to negative, while reaffirming the Asian financial centre’s AAA rating.

“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,” S&P said in a statement.

In response to S&P’s move, the Hong Kong government said that while it welcomed the rating agency’s recognition of its credit strength and economic fundamentals, it disagreed with the assessment and revision of the credit outlook.

“We continue to believe that Hong Kong is in a good position to benefit from the structural rebalancing in the mainland economy from investment to consumption, as the increase in demand in services will create new business opportunities for a service-oriented economy like Hong Kong,” it said in a statement.

The news is unlikely to be welcomed by Chinese officials, many of whom have publicly criticized the Moody’s downgrade as baseless.

Linus Yip, strategist at First Shanghai Securities Ltd in Hong Kong, said that investors need time to study the logic of S&P’s downgrade to understand the implications.

The yuan currency weakened slightly in offshore markets CNH= after the S&P news but later steadied.

“This has been well flagged - a greater than expected slowdown and worries about very high levels of bad debt in the economy, especially with respect to loans to struggling industrial companies and property lending,” said London-based Sanjiv Shah, CIO at Sun Global Investments.

”However, it should be noted that China’s rating is a high AA- and even if this eventually results in a downgrade, China is still likely to be an A+ credit, which is still much better than all emerging market peers and many middle income and developed countries.”

The Chinese government has grown increasingly active in trying to control the conversation over its economic outlook both at home and abroad, concerned that negative sentiment could encourage capital flight that would sabotage attempts to reinvigorate growth through investment.

Investors, both foreign and Chinese, have grown increasingly nervous as growth in the world’s second-largest economy has cooled to a 25-year low, raising questions about Beijing’s ability to deliver on promised reforms such as shedding bad debt and reducing industrial overcapacity without setting off a financial crisis or a spike in unemployment.

Chinese stock markets remain subdued after a bone-rattling crash in the summer of 2015 that only recently showed signs of bottoming out, and money flowed out of yuan-denominated assets at record rates as the currency slid against the dollar last year.

Reporting by the Bangalore Newsroom; Additional reporting by Sam Shen and Umesh Desai; Editing by Richard Borsuk and Kim Coghill

Our Standards:The Thomson Reuters Trust Principles.
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