S&P, the global rating giant, has lowered China’s economic outlook to A+ from AA- days after the Communist Party suddenly and unexpectedly cracked down on crypto exchanges.
This is China’s first downgrade in two decades and comes just three weeks ahead of China’s five yearly congress where most of the top leaders are to be replaced. Kim Eng Tan, an S&P senior director of sovereign ratings, says:
“Despite the fact that the government has shown greater resolve to implement the deleveraging policy, we continue to see overall credit in the corporate sector to stay at a 9 percent point.
We’ve now come to the conclusion that while we do expect some deleveraging in the next few years, this is likely to be much more gradual than we thought could have been the case early this year.”
Analysts are worried about China’s ever growing debt levels. Tom Orlik, chief Asia economist for Bloomberg Intelligence, says:
“I think S&P are reacting to something which Moody’s was reacting to earlier in the year and which global markets have had in mind for awhile and that’s the sustained, unsustainable growth in China’s credit – that explosion in the ratio of debt to GDP which has rung all kinds of alarm bells and raised fears of some kind of hard landing for China.”
In response, China’s finance ministry called the decision made by the more than a century old agency as “wrong,” stating:
“S&P’s focus on credit and debt growth is largely old talk. It’s a pity that international rating agencies have been misreading the Chinese economy with their old mindsets and experiences gained from developed economies.”
But Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong, said that the continued rise in debt levels shows that “this is a steady, gradual deterioration in the risk profile of China.”
The downgrade makes China less attractive for foreign investors, adding to potential concerns they may have had regarding China’s sudden complete u-turn on digital currencies.
They closed down businesses that employ hundreds in an unexpected action undertaken without even a hint, which may lead foreign investors to wonder whether something similar could happen to their companies or investments.
Meanwhile Steve Bannon, a somewhat close adviser to Trump, has made his way to Beijing allegedly meeting a close ally of China’s president who is attracting much speculation regarding whether he will step down or whether the President might increase his iron grip on the country.
Bannon has accused China of engaging in economic warfare with US, “appropriating” technology while not enforcing property rights.
With China heavy criticized for engaging in protectionist policies towards internet companies with most of them denied access to the market. Bitcoin being the latest in the long list.