Articles
21 September 2017

S&P rating cut is negative for Chinese bonds

The rating cut is really negative for China’s sovereign bond market, and also for China’s corporates.

Chinese High Street
istock

S&P cut China's sovereign credit rating from AA- to A+ with a revised outlook from negative to stable. S&P commented that “China’s prolonged period of strong credit growth has increased its economic and financial risks.” The timing of the rating cut is also interesting, a month before the 19th Politburo.

The rating cut is really negative for China’s sovereign bond market, and also for China’s corporates.

We have seen that the PBoC is trying to reform the CNY to be more market-oriented by removing reserves from forward contracts. That should attract more foreign investors in the onshore CNY sovereign bond market (as they can hedge at lower costs). But S&P’s rating cut is a big blow for China’s sovereign bond market as foreign investors will be more hesitant to invest in Chinese bonds (whether in CNY or in other currencies).

The timing of the rating cut is also interesting, a month before the 19th Politburo.

Finally, we only partially agree with the S&P decision. Corporate credit, although still high, has come down to 166% of GDP in August 2017 from 170% of GDP in Feb 2017, and the economy is expected to grow at 6.8% in 2017. That suggests corporate leverage will continue to come down. Consequently, we cannot agree with S&P that economic and financial risks are rising. Possibly, the declining leverage ratio is the reason for S&P changing China’s outlook from negative to stable.

On financial risks, the restrictive framework on negotiable certificates of deposit imposed by the banking regulator has limited risks on interbank activities. Liquidity risk is finely managed by the PBoC on a daily basis. We can only agree with S&P that credit leverage will continue to be high (above 100% of GDP).


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