S&P Downgrades China’s Debt, Citing a Surge in Lending
State-controlled banks have been funneling big loans to chronically money-losing state-owned enterprises, allowing these enterprises to avoid layoffs. Indebted local governments have been borrowing heavily as well, partly from banks but increasingly by issuing bonds. Even China’s national government, fairly cautious in its previous borrowing, has been running budget deficits lately, while the country’s famously frugal households have begun using more credit as well.
“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said in a statement.
Chinese officials did not immediately respond to a request for comment.
The downgrade comes four months after a similar downgrade by Moody’s Investors Service. The Moody’s downgrade infuriated the Chinese government, which contended that the downgrade failed to properly reflect China’s $3 trillion in foreign currency reserves as well as the large holdings of land and other assets.
The Chinese government is likely to be particularly upset with Standard & Poor’s because it issued the downgrade less than a month before start of the Communist Party’s Congress, which is held only once every five years. The congress is expected to reconfirm President Xi Jinping as the country’s core leader but choose some new top officials to serve with him.
Mr. Xi has made political and economic stability the country’s top priority in the months leading up to the congress. That has included allowing the state-controlled banking system to continue, and even expand its already heavy lending since midsummer, while a modest effort in late spring to limit the growth in lending has been pursued with less zeal.