Expert says S&P downgrade 'not comprehensive'

Bai Chong'en, director of the National Institute for Fiscal Studies at Tsinghua University. [Photo provided to China Daily]

US financial service agency S&P's decision to downgrade China's credit ratings is "not comprehensive" as the rating ignored the fact that China's stronger economic performance in the first six months has helped a great number of enterprises to have stronger debt-paying abilities, an expert said.

Bai Chong'en, director of the National Institute for Fiscal Studies at Tsinghua University, pointed out that profits for businesses in China had increased considerably in the first half of 2017 and had equipped them with a stronger debt-paying ability, and S&P's downgrading decision should have also taken this fact into account.

The agency lowered China's sovereign credit rating by one notch to A+ from AA- on Thursday, citing economic and financial risks arising from China's fast credit growth.

"Prices of raw materials have risen rapidly in the first half, and this has brought greater profits for companies in these industries. Increased profit for these companies means that their debt-paying ability has also increased accordingly, which reduced financial risks they are bearing. I think financial services like S&P ignored this when downgrading China's credit rating," Bai said.

Figures from the National Bureau of Statistics show that the profits of industrial enterprises above a designated size have increased in the first half. In the January-July period, total profit made by industrial enterprises above a designated size was up 21.2 percent year-on-year, 14.3 percentage points higher than the same period last year.

At the same time, statistics from Lange Steel Information Research Center show that consumption of steel surged by 14.3 percent year-on-year for the first seven months.

Bai said China's strong economic performance in the first half has brought increased profits for companies in the raw materials sectors, while these business entities are previously those with comparatively higher leverage rates. This will enable their debt-paying ability.

"Risks not only depend on the amount of debts in general, but also depend on the way debts are distributed," he said. "And I think in this regard China now in fact has a stronger debt-paying ability."

He also said that cutting costs for enterprises remains important along with the nationwide tax reform that changed the country's original business tax to a value-added tax.

"Tax and fees are both burdens to those doing business in China. Here the amount and the variety of fees that companies need to deal with is still huge. Paying such fees is a big burden to enterprises both financially and psychologically," he said. "I think the government needs to review the number of types of fees regularly and cut down those outdated ones."

He also said that China's VAT reform is a positive move in improving the tax system, and will gradually cut cost burdens for enterprises in the long run.