Growth in Chinese debt prompts S&P downgrade and takes Hong Kong with it

Concerns over the swelling levels of Chinese debt which now stand at 260% of GDP has prompted the Standard & Poor’s international rating agency to downgrade the country’s long-term foreign and local currency ratings to “A +” from “AA-“. It is the first time that it has revised China’s  ratings downwards since 1999 and follows a similar move by Moody’s Investors Service earlier in the year. Both agencies have also downgraded Hong Kong,  S&P from AAA to AA+, and Moody’s from stable to negative.
In S&P parlance, AA- equates to a ‘stable’ rating which, the agency said in a statement earlier this week, reflected its view that the long period of rapid growth in lending experienced by the Chinese mainland had increased economic and financial risks in the republic. Despite the fact that this had contributed to strong GDP growth and an increase in the value of assets, it believed that it had also undermined China’s financial stability; but it also expects China to maintain a strong rate of economic growth over the next three to four years.
S&P’s decision to downgrade Hong Kong was a reaction to the “strong institutional and political linkages” between the offshore financial hub and the mainland, it explained.  “We are lowering the rating on Hong Kong to reflect potential spillover risks to the Special Administrative Region [SAR] should deleveraging in China prove to be more disruptive than we currently expect,” it said.
Further downwards revisions may follow if the Chinese authorities fail to contain the growing financial risks  by permitting further increases in lending to stimulate economic growth, it warned. “We believe that such a trend will weaken the flexibility of the Chinese economy in the face of shocks, and also increase the likelihood of a slowdown in GDP growth.”