Chinese economic outlook downgraded

Ratings agency Standard & Poor’s today downgraded the sovereign debt outlook for China from stable to negative amid criticism that the threat of a debt crisis were not being addressed quickly enough.

The Chinese economic outlook rating from Standard & Poor’s (S&P) was today downgraded from stable to negative, as the ratings agency called for the Chinese government to speed up its economic reforms and highlighted the potential risks of deteriorating ratios between government and corporate leverage. The country’s ultra-high rating of AA- remains, although this revised outlook for sovereign debt can potentially be viewed as a warning that the days of enjoying this impressive overall rating could be numbered if the situation does not change soon.

The downgrade is based largely on China’s high levels of debt and potentially unsustainable borrowing, in addition to what the ratings agency sees as a potentially unsustainable investment rate, at a level above the higher end of the spectrum at 30-35% GDP. The ratio of debt to growth is cause for concern in terms of global economic risk. To compare to other key market participants, this investment level sits at around 20 percent for the UK, US, and Germany.

They highlighted the risk that China’s debt could grow by almost 15 percent over the next three years, posing wider economic risks that would affect both growth and stability. These high levels could mean that the Chinese economy is less resilient to both internal and external economic shocks, limiting the policy options available to the Chinese government and having the potential to cause a greater slowing of growth.

Any sudden economic changes or currency headwinds could affect not only the stability and growth of the Chinese economy, but also all its major trading partners, such as the US and UK, and their respective currencies.

Many market commentators are concerned about further devaluation of the yuan after the surprise moves last year, although, in contrast, S&P did emphasise that the overall strength of the Chinese economy is generally stable and even positive looking to the long term. However, S&P stated that today’s downgrade to a negative outlook reflects the potentially growing financial and economic risks that could come into play either this year or in 2017.

The ratings agency also called for greater transparency and availability of information on the Chinese financial markets, reflecting recent discussions among world leaders to improve communication and collaboration on matters relating to fiscal, economic and currency policy.