S&P downgrades China's outlook to negative, sees risks to government's creditworthiness

On March 31, 2016, Standard & Poor's Ratings Services revised the outlook on the People's Republic of China to negative from stable. At the same time S&P affirmed 'AA-' long-term and 'A-1+' short-term sovereign credit ratings on China. The downgrade follows a similar move by ratings agency Moody's Investor Services in early March.

S&P said that economic rebalancing in China is likely to proceed more slowly than expected and added that gradually increasing economic and financial risks to the government's creditworthiness could result in a downgrade this year or next.

The rating agency said that downgrade could ensue if we see a higher likelihood that China will seek to stabilize growth at or above 6.5% by increasing credit at a significantly faster rate than the nominal GDP growth, such that the investment ratio is above 40%. Such 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 the trend growth rate.

If, on the otherhand, the central government adopts policies to moderate credit growth at levels more in line with nominal GDP growth, accompanied by signs that rebalancing will progress more quickly than we currently expect, ratings could stabilize at this level, noted S&P.

The news is unlikely to be welcomed by Chinese officials, many of whom have publicly criticized the Moody's downgrade as baseless. The yuan currency weakened slightly in offshore markets after the S&P news but later steadied to currently trade at 6.4605 against the dollar.