China hits back at S&P downgrade

BEIJING - China hit back Friday at the S&P Global Ratings' downgrade of the country's sovereign credit rating, with the finance ministry calling it a "wrong decision."

The Ministry of Finance (MOF) website described the decision as "perplexing," with the economy on a firm footing.

S&P said Thursday that it had lowered China's long-term sovereign credit rating to A+ from AA-, because a "prolonged period of strong credit growth has increased its economic and financial risks."

Calling the reasoning a "cliche," the MOF said it was a pity that S&P had focused on credit growth and debt, but ignored China's distinctive financing structure, the wealth-creating effect of the government spending and its support for growth, as well as the country's sound economic fundamentals and development potential.

"The downgrade is a result of international rating agencies' long-standing mode of thinking, and a misreading of the Chinese economy based on developed countries' experiences," read the statement.

The government would maintain financial stability by remaining prudent on lending, tightening supervision and controlling risk, the ministry said. Stable and relatively fast growth would be maintained with credit kept at a reasonable level.

In any case, credit growth is decelerating. At the end of August, M2 -- cash in circulation plus deposits -- was up 8.9 percent from a year before, but the pace of growth was down for the seventh straight month.

Addressing debt growth, the MOF said local government debt issues would be addressed through continued fiscal reform. S&P had claimed that local government financing vehicles (LGFVs) continued to fund public investment with borrowing that could require repayment by the government. The ministry insists that debt of LGFVs will be paid off by the companies themselves, and governments would not be liable.

Liu Shangxi, head of Chinese Academy of Fiscal Sciences, said the commonly used debt analysis framework was flawed as it ignored how debt was used. The majority of China's debt went on public facilities and infrastructure, which provide impetus for growth, Liu said.

S&P rival, rating agency Moody's, downgraded China's credit rating in May, so the S&P downgrade was not surprising, said Qiao Baoyun, head of the academy of public finance and public policy under Central University of Finance and Economics.

S&P theory did not apply to China's development and resilience, Qiao said.

Financial markets were muted. The benchmark Shanghai Composite Index Friday edged down an unexceptional 0.16 percent to 3,352.53.

Economist Liu Liu said after 5 years of downward adjustment, economic growth has stabilized and is healthier and more sustainable, but overseas observers, including rating agencies, have an assessment of China's economic fundamentals that is "behind the curve."

GDP grew faster than expected in the first half of the year, above the government's 2017 target.

S&P's downgrade is a reminder of deficiencies in the economy and the need for reform, but not a reflection of credit risk or economic fundamentals, Liu said.