Investors shrug off S&P's China credit downgrade, have faith in China's growth

Updated 2017-09-23 09:00:51 Xinhua

U.S. investors shrugged off the financial service agency S&P's decision to downgrade China's credit ratings, and believed China's economy would continue to be one of the key drivers of global economic growth.

S&P Global Ratings said Thursday that it had lowered China's sovereign credit rating to A from AA-, citing economic and financial risks from China's fast credit growth.

"S&P's decision ignores the reality that China's credit has been slowing with an increased policy focus on containing and diminishing debt," Brendan Ahern, chief investment officer of Krane Funds Advisors, told Xinhua.

"I do not believe investors, foreign nor domestic, will be influenced by the S&P decision," Ahern added.

Tom Orlik, Bloomberg's chief Asia economist, echoed that the move by S&P Global Ratings is likely to have little impact on investor sentiment or China's funding costs.

"China borrows very little from overseas, which means the impact of the downgrade on its funding costs will be limited," said Orlik, in a note.

Borrowing from abroad is in mid-single digits as a percentage of total borrowing, according to Bloomberg Intelligence Economics' calculations.

He said the chances of a major adverse reaction to the S&P downgrade are limited.

"Rating agencies play a role in forming an investor's opinion though one should always rely on your own due diligence," said Ahern.

China's Ministry of Finance (MOF) said on Friday that it was a "wrong decision" for the rating agency to downgrade China's sovereign credit rating.

Calling the reasoning "cliche," the MOF said it was a pity for S&P to focus on China's fast credit growth and debt issues, but ignore the country's distinctive financing structure, the wealth-creating effect of government spending and its support for growth, as well as sound development fundamentals and growth potential.

"The S&P ratings cut is a belated recognition of a serious problem that China has already begun to address," Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia, told Xinhua.

The MOF said the government had always attached importance to the local government debt problem and would continue fiscal reform to ensure healthy finances.

China's central bank, the China Banking Regulatory Commission, and the State Council have all take explicit actions in 2017 to reduce the expansion of debt -- especially the mounting indebtedness of state-owned enterprises, said Roach.

"These efforts now seem to be having a positive impact. According to the Bank for International Settlements, China's 'credit gap' - its quarterly debt/GDP ratio relative to the long-term trend in this ratio - actually declined in the final two quarters of 2016 after having increased almost steadily since late 2011," the expert added.

Roach said this is an important step "in the right direction" - and hopefully recent policy actions noted above will reinforce this deleveraging in the quarters ahead.

Meanwhile, missing in the S&P debt assessment was recognition that China's outsize reservoir of domestic saving - nearly 48 percent of GDP in 2016 - provides the nation with an important cushion that other overly-indebted economies lack.

"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 saving in China," Roach said.

Ahern also mentioned that China's sovereign debt is held by domestic investors in the local currency. Issuing foreign denominated debt is how sovereign debt becomes compromised which is not the case for China.

In addition, many analysts believe China's economy will continue to be one of the key drivers of global economic growth.

Roach said China's high saving offers an effective "insurance policy" that reflects a very high priority on "financial stability."

"The first half of 2017 defied low expectations which I expect to occur in the second half of the year as well," said Ahern. "As the middle man in the global economy, China's robust economic numbers are indication the global economy is recovering but also China's key role in the recovery."

China's GDP grew faster than expected in the first half of the year, up 6.9 percent from a year earlier.

Since the fourth quarter of 2008, average quarterly real GDP growth in China has been 8.2 percent year on year, while the equivalent figures for the United States and euro area are 1.4 percent and 0.4 percent, respectively, according to Paul Sheard, executive vice president and chief economist of S&P Global.

"As long as China continues to emphasize financial stability - and takes actions aimed at promoting it - the threat to growth and development should not be serious," Roach said.

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