China's debt downgraded by second ratings agency

Standard & Poor's slashed China's credit rating on Thursday over warnings that its ballooning debt had raised "economic and financial risks", marking the country's second downgrade this year.

The decision by S&P, which downgraded China's debt from AA-minus to A-plus, follows a similar decision in May by Moody's, which had also raised concerns about the growing debt of the world's second largest economy.

"The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China's economic and financial risks," New York-based S&P said in a statement.

While the credit growth has fuelled China's economic expansion and high asset prices in recent years, "we believe it has also diminished financial stability to some extent", the agency said.

Debt-fuelled investment in infrastructure and property has underpinned China's rapid growth, but there are widespread concerns that years of freewheeling credit could lead to a financial crisis with global implications.

Beijing has been clamping down on bank lending and property purchases, but those efforts are complicated by the government's determination to meet its full-year growth target of around 6.5 percent.

That compares with last year's pace of 6.7 percent, which was the slowest in around a quarter of a century.

Premier Li Keqiang said in June that China could meet its target.

"The recent intensification of government efforts to rein in corporate leverage could stabilise the trend of financial risk in the medium term," S&P said.

"However, we foresee that credit growth in the next two to three years will remain at levels that will increase financial risks gradually."

- 'Awkward' timing -

Mark Williams, chief China economist at Capital Economics, said S&P's decision "won't be news to anyone who has kept half an eye on China over recent years and shouldn't change anyone's thinking. S&P is playing catch-up."

However, Williams said, the downgrade was "arguably questionable on the basis of recent economic and financial development."

With credit growth now slowing and the latest tightening of liquidity appearing to have peaked, "the immediate risk of some form of credit event is probably lower now than a few quarters ago," he said.

He noted that the timing was "awkward," coming just ahead of the country's important Communist Party congress next month, when President Xi Jinping is expected to be given a second five-year term as head of the party.

- New downgrade warning -

When Moody's downgraded China to A1 in May, it was the first time in almost three decades that the country's credit rating was cut.

But another major credit ratings agency, Fitch, maintained its  A-plus score for China in July, though it warned that the growing debt could trigger "economic and financial shocks".

China posted better-than-expected second quarter growth as the economy expanded by 6.9 percent, but analysts have warned that the momentum may not last.

The economy revealed fresh signs of headwinds in August as data showed last week that industrial output and retail sales unexpectedly slowed for a second consecutive month. Fixed asset investment was also well below expectations.

S&P said it "may raise" its rating on China if debt growth slows significantly while the country maintains economic growth at "healthy levels".

However, it warned that another downgrade "could ensue if we see a higher likelihood that China will ease its efforts to stem growing financial risk and allow credit growth to accelerate to support economic growth".