S&P raises China's debt rating

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By Andrew Wood in Hong Kong

Friday, August 01, 2008
  

China's sovereign debt has been upgraded by Standard & Poor's to reflect the country's improving government finances, record foreign reserves and potential for “exceptional” economic growth.

The ratings agency also raised its assessment of Hong Kong's debt and of four state-owned development lenders.

The ratings improvement comes just a week before the start of the Beijing Olympics, which the country is using as a showcase for its development and progress.

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China has accumulated $1,810bn of foreign reserves – the world's biggest national stockpile. Five years of double-digit economic growth are boosting tax revenues and creating budget surpluses. China's long-term sovereign credit rating has risen from A to A+ and the short-term from A-1 to A-1+.

The outlook is stable, meaning that S&P thinks the risks to government finances is moderate over the next three to five years.

“The ratings upgrade is motivated by China's improving fiscal and external position,” said Kim Eng Tan, S&P credit analyst. “These improvements to the government balance sheet will offer greater resilience to deal with the shocks of a potential sharp economic downturn.”

S&P says the key weakness in China's credit quality comes from the risk to government finances from an abrupt and prolonged economic slowdown arising from distress in the banking sector. It says that the risk is being made worse by the way in which policymakers rely on administrative measures in their efforts to manage the economy.

The agency says ratings could be upgraded further if structural reforms bring better performance in key domestic industries, especially financial institutions.

But if reforms flag and the economy slows, then there will be pressure to lower the rating again.

S&P also raised its long-term ratings on Agricultural Development Bank of China, Export-Import Bank of China, China Development Bank, and China Export & Credit Insurance Corporation from A to A+. The long-term rating for Hong Kong was upgraded from AA to AA+.