Credit Rating Downgrade from S&P: Could China’s Credit Growth Stall?
Aggregate financing jumped
China’s aggregate financing measures liquidity and reflects the total funds provided by a financial system to its nonfinancial sectors and households. China’s (MCHI) aggregate financing came in at 1.5 trillion yuan in August as compared to ~1.2 trillion yuan in July 2017. The credit gauge was also higher than the median estimate of 1.3 trillion yuan.
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New yuan loans
The new loans issued by Chinese banks were also higher month-over-month and came in at $1.1 trillion yuan in August as compared to 825.5 billion yuan in July. The new loans were higher than the median estimate of 950 billion yuan.
M2 money supply growth slowed
While both the above two credit measures showed an increase and surpassed economists’ expectations, the broad money supply came in below their estimates. The M2 money supply rose 8.9% in August as compared to 9.2% in July. The M2 money supply encompasses cash, checking deposits, savings deposits, money market mutual funds, and other time deposits. This metric was lower than the 9.1% growth forecast by economists.
Credit downgrade by S&P
On September 21, 2017, S&P (Standard and Poor’s) cut China’s sovereign credit rating from AA- to A+. This was the first time since 1999 that the credit rating agency has done that. Fitch and Moody’s had downgraded their rating for China in May 2017. S&P cited increasing risks from soaring debt as the main reason behind the downgrade. This downgrade also shows that the global markets believe that China might have a difficult time striking a balance between maintaining its economic growth and adjusting its financial sector. Earlier, the International Monetary Fund (or IMF) had also warned about the increasing financial risks the Chinese economy faced.
Chinese authorities are coming down on excessive credit growth. This growth had fueled property market growth in China. Thus, a consistent crackdown on credit could further slow down the property and infrastructure sectors, which would be a negative for iron ore miners (COMT). Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and the Asia-Pacific division of Cleveland-Cliffs (CLF) are among those players.