The Ministry of Finance has issued a strongly worded response to Standard & Poor’s latest decision to downgrade China’s sovereign credit rating by one notch to A+ from AA-.
S&P’s announced on 21 September that the downgrade of China’s credit rating was motivated by concerns over the country’s exorbitant debt burden, which hit USD$28 trillion by the end of last year.
In response to a query from journalists on how the Ministry of Finance viewed the latest S&P downgrade, a ministry spokesperson said that “the S&P downgrade of China’s sovereign credit rating is a mistaken decision.”
“In recent years, faced with changes comparative advantages for economic growth and factor endowments, the Chinese government has strived to advance supply side structural reforms, and the economic growth foundation has become more stable, and the quality of economic growth has further risen.
“Under such circumstances, the S&P downgrade of China’s sovereign credit rating is hard for people to comprehend.
“The excessively rapid credit growth, debt burden and other problems that S&P has focused upon are for the most part old talking points for China’s current stage of economic development.
“This viewpoint overlooks the unique features of the structure of China’s financial market, and overlooks the wealth accumulation and material support produce by the Chinese government’s expenditures.
“It’s very regrettable that this is the complacent way of thinking that international ratings agencies have long held, as well as a misunderstanding of the Chinese economy based on the experiences of developed countries.
“This misunderstanding overlooks the Chinese economy’s excellent fundamentals and growth potential.”
The Ministry of Finance disputed S&P’s decision to include the corporate debt of local finance platforms in its assessment of total government debt levels.
“China’s Budget Law, Company Law and other laws clearly distinguish between the debts of Chinese local governments and those of state-owned enterprises…the debt raised by local SOE’s (including finance platform companies) is not categorised as government debt according to the law.
“Such debts are paid back by SOE’s, and local governments do not bear liability for repayment. Local governments act as capital contributors, and their liability is restricted to their capital contribution.
“As of the end of 2016, China’ s local government debt balance was 15.32 trillion yuan, which when added to the central government debt balance of 12.01 trillion yuan means the Chinese government’s debt balance is 27.33 trillion yuan, equivalent to 36.7% of GDP.”
When asked about the concerns expressed by S&P’s over China’s excessively rapid credit expansion and its potential impact upon the stability of the financial system, the ministry spokesperson responded that “China is a high-savings rate nation, and the large volume of household savings is converted by financial intermediaries into corporate sector debt.
“High savings supports China’s use of indirect finance as the primary guide of the financial system, and bank loans have always occupied a dominant role in total social financing.
“We only need to issue loans with prudence, strengthen regulation and properly prevent credit risk, in order to be able to maintain the stability of China’s financial system.”
The Ministry of Finance further pointed out that China’s efforts to maintain a stable monetary policy will abet the stability of the country’s financial system.
“Over the past several years, faced with quantitative easing monetary policy by major countries and the pain of shifting domestic growth drivers, the Chinese government has continually and firmly maintained a stable monetary policy.
“Chinese money growth is currently gradually on the decline, with the broad M2 money supply posting year-on-year growth of 8.9% in August, far lower than the average rate of growth since the 2008 Global Financial Crisis.
“At the same time the Chinese government is strengthening financial risk prevention, standardising asset management operations, shrinking the space for shadow banking to persist, and vigorously maintain the stability of the financial system and the sustainability of servicing the real economy.”