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May 30, 2017

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S&P in no hurry to follow Moody’s China rating cut

STANDARD & Poor’s is likely to follow its regular ratings review schedule for China, and does not see any basis at this point for an out-of-schedule committee meeting, a senior director at the ratings agency said yesterday.

Moody’s Investors Service last week cut its sovereign ratings on China by a notch, putting them on par with those of Fitch Ratings.

That put S&P one step above the two agencies, holding an AA- rating with a negative outlook that it has maintained since March 2016.

“I don’t think there has been anything that could justify the calling of an out-of-schedule committee at this point in time, so we are likely to follow our regular review pattern,” said Kim Eng Tan, S&P’s Asia-Pacific senior director of sovereign ratings.

He declined to say when the next regular review would be.

Moody’s cut China’s sovereign ratings to A1, saying it expected the financial strength of the world’s second-largest economy to erode in coming years as growth slowed and debt continued to mount.

Fitch last Friday maintained its A+ rating on China, citing its “strong macroeconomic track record,” though the agency also noted an accompanying build-up of imbalances and vulnerabilities. But nobody is expecting any form of financial instability anytime in the near future, Tan said.

“Despite the (Moody’s) downgrade, all the major agencies have really high ratings on China, whether it’s A+ or AA-, they are both high ratings.”

Government-led stimulus has been a key driver of China’s economic growth in recent years. But that has been accompanied by credit growth that has created a mountain of debt — now at nearly 300 percent of gross domestic product.

S&P last changed its rating on China in late 2010, when it upgraded it by one notch.

China has pledged to lower debt levels by rolling out steps such as debt-to-equity swaps, reforming state-owned enterprises and reducing excess industrial capacity.

In recent months, regulators have issued measures to clamp down on the shadow banking sector while the central bank has gingerly raised short-term interest rates.

Tan expected China’s annual economic growth to slow to 6 percent in the next few years.

Moody’s expects GDP growth to slow to around 5 percent in coming years, but says the economy will remain robust and the likelihood of a hard landing is slim.

The Chinese government is targeting GDP growth of around 6.5 percent this year.


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