China rating outlook cut at S&P on risk of slower rebalancing

Standard & Poor’s has cut the outlook for China’s credit rating to negative from stable, saying the nation’s economic rebalancing is likely to proceed more slowly than the ratings firm had expected.
China’s AA- long-term credit rating now has a negative outlook, S&P said in a statement. Earlier in March, Moody’s Investors Service made a similar revision, highlighting surging debt and questioning the government’s ability to enact reforms.
“We revised the outlook to reflect our expectation that the economic and financial risks to the Chinese government’s creditworthiness are gradually increasing,” S&P said in a statement. “This follows from our belief that, over the next five years, China will show modest progress in economic rebalancing and credit growth deceleration.”
Facing deflationary pressure at home and tepid demand from abroad, China’s policy makers are juggling reforms aimed at cutting overcapacity with stimulus to cushion the blow. Leaders have flagged more fiscal support this year, and room on the monetary front to support growth.
China’s economic expansion will remain at or above 6 percent a year in the next three years, S&P forecast. The investment rate may be “well above” what S&P says are sustainable levels of 30-35 percent of GDP.
“In our opinion, these expected trends could weaken the Chinese economy’s resilience to shocks, limit the government’s policy options, and increase the likelihood of a sharper decline in trend growth rate,” it said.
Chinese stock-index futures trading in Singapore fell after the S&P announcement, with the FTSE China A50 April futures extending declines to 0.8 percent. The offshore yuan rose before paring gains to trade 0.14 percent higher at 6.4678 a dollar.
“They are just reiterating the potential risks that we already know,” said Tommy Xie, Singapore-based economist at Oversea-Chinese Banking Corp. “It seems like S&P are playing catch up and I doubt we will see any significant impact on markets. If anything we’ll probably see some government-linked media fighting back in the coming days.”
To support economic growth targets, China’s top planning agency is doling out new fiscal stimulus, further raising the amount of money available to local governments this year under a special infrastructure bond program, people familiar with the matter told Bloomberg earlier yesterday. Bloomberg