S&P rating cut lacks credibility: Experts

Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing, March 30, 2016. [Photo/Agencies]

Leading economists and financial experts spoke out on Monday against S&P Global Ratings' downgrading of China's sovereign credit rating, saying that the moves lacked credibility and neglected the reality of the nation's financing structure and the overall quality of the country's banking industry.

"S&P Global Ratings' decision focused only on China's leverage level but overlooked the possibilities of risk control in a different financing structure," said Pan Guangwei, executive vice-president of the China Banking Association.

China's leverage level had been on the rise for some time, said Pan, but it was too simplistic to directly compare it with other countries.

"China has an indirect financing-oriented financial system and banking loans play a leading role in social funding," said Pan.

"China is a country with a high savings rate, which currently stands at 46 percent, and the large amount of savings is transformed through banks into corporate loans, which is likely to drive up the leverage ratio."

Pan added that China's debt corresponds to a large number of high-quality assets and stable cash flow. For example, State-owned enterprises and local governments have a number of profitable and realizable assets including highways.

Lian Ping, chief economist with the Bank of Communications, agreed with Pan that S&P Global Ratings should not only pay attention to debts, but also assets. A rating body with low debt and few good assets could be risky, and a rating body with high debt and a number of good assets may be safe.

"Besides, S&P Global Ratings should have a forward-looking perspective when making a decision," said Lian.

"China has a very clear goal to largely develop direct financing," he added.

Pan also said the rating agency overlooked the fact that the overall quality of Chinese banking industry is improving. The scale of Chinese banking assets and liabilities has grown steadily and the quality of credit assets is stable.

By the end of the second quarter of 2017, the total amount of renminbi and foreign currency assets in the Chinese banking industry was 243.2 trillion yuan ($36.7 trillion), up 11.5 percent year-on-year. Liabilities totaled 224.9 trillion yuan, an increase of 11.5 percent year-on-year, according to the China Banking Regulatory Commission.

The CBRC data showed that Chinese banks' non-performing loan ratio in the second quarter this year was 1.74 percent, remaining the same for the past three quarters in a row.

Chen Min, board secretary of China Development Bank, said S&P Global Ratings downgrading of CDB ignored reality.

"China Development Bank has offered real economy funds totaling 16.6 trillion yuan for the past five years," said Chen. "Our non-performing loan ratio was lower than 1 percent for consecutive 49 quarters, showing that we have a world-leading risk control capability."

Standard & Poor's on Thursday cut China's long-term sovereign rating by one notch to A+ from AA-, citing its increasing debt risks, followed by further downgrading its ratings on several Chinese banks and financial institutions such as China Development Bank, Export-Import Bank of China and Agriculture Development Bank of China.

China's Ministry of Finance said in a statement on Friday that the decision was "perplexing" as it came while China's economy had been on a firm growth track following its achievement of higher-than-expected growth rates in the first half of this year and solid progress in economic restructuring and debt reduction.