S&P Raises Chinese Debt to AA- Following Dagong's U.S. Downgrade

Includes: CAF, FXI, GXC, PGJ
by: Benjamin J. Garber

Standard & Poor’s raised China’s long-term sovereign credit rating from A+ to AA- yesterday, citing the nation’s strong foreign reserves and fiscal position. This comes just over a month after China’s Dagong Global Credit Rating Co. reduced their rating for U.S. debt from AA to A+ (for the full story read my 12 November 2010 article China’s Dagong Lowers U.S. Credit Rating). S&P also affirmed its short-term ratings at A-1+; the outlook is stable.

The agency’s credit analyst Kim Eng Tan remarked,

We believe the Chinese authorities would respond to future threats to financial stability with timely measure, based on our observations over the past two years... We may raise the ratings again if structural reforms lead to sustained economic growth that significantly lifts the average income level.

A statement from S&P notes that implementing structural reform during the global slowdown improves the likelihood of macroeconomic stability – pay attention Berlusconi, McAleese, Papoulias, and Obama.

The rating agency also raised Hong Kong’s long-term credit rating to its highest rating of AAA from AA+. Mr. Tan commented that,

Few governments weathered the global economic downturn better than Hong Kong.

The upgrades for both mainland China and Honk Kong are largely due to the regions low levels of debt, strong asset base, and high prospects for growth. On 11 November Moody’s Investors Service upgraded the Chinese government’s bond rating to Aa3 from A1, while maintaining its positive outlook. Fitch now stands alone as the only major ratings agency to rate Chinese debt at A+, one step below the S&P and Moody’s ratings.

A statement from S&P cautioned,

Strong growth in mainland China and deepening economic and financial links have boosted Hong Kong’s economic growth prospects... The main credit weaknesses are Honk Kong’s reliance on volatile revenue sources and the potential risks associates with weaker institutions in lower-rated China... we may lower the ratings [on mainland China] if reform efforts weaken, in combination with a markedly weaker economic performance and worsening banking-sector credit metrics than what we currently expect.

Continued actions such as these from the ratings agencies are sure to make the negotiations to manage trade deficits and fiscal policy between the United States and China more interesting. Likely it will be the world’s businesses and workers who get caught in the middle.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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