China's debt downgraded by second ratings agency

REUTERS

While the credit growth has fuelled China's economic expansion and high asset prices in recent years, "we believe it has also diminished financial stability to some extent", the agency said.

China's gross domestic product (GDP) grew 7.3 percent in 2014, 6.9 percent in 2015, and 6.7 percent past year, according to the International Monetary Fund (IMF) data.

Despite government measures, S&P foresee the credit growth in the next two to three years to remain at levels that will lift financial risks gradually.

Chinese firms and wealthy business tycoons have taken control of assets including Legendary Entertainment, the U.S. film producer behind Jurassic World and Warcraft, buildings such as the Cheesegrater in London, and English football clubs including Southampton and Aston Villa.

While risks are rising, S&P said the government's recent efforts to reduce corporate leverage could stabilize conditions in the medium term.

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"It is in recognition of the reality that, concerns notwithstanding, the authorities are not planning to rein in credit growth in a forceful way", said Louis Kuijs at Oxford Economics in Hong Kong. It said the country was forecast to expand by 6.7%, although stressed that this was as a result of Beijing pursuing growth targets at the expense of the quality of economic output.

According to the International Monetary Fund, total non-financial sector debt is 236.4 percent of China's GDP in 2016 and is projected to rise further to almost 300 percent of GDP by 2022. Over time, it said, this could improve the private sector business environment.

But another major credit ratings agency, Fitch, maintained its A-plus score for China in July, though it warned that the growing debt could trigger "economic and financial shocks".

According to S&P, the latter reflected the likelihood of continued robust economic and fiscal performance over the next three to four years.

S&P on Thursday followed Moody's Investors Service earlier this year in lowering its rating for China, just as the nation prepares for its first sovereign dollar bond sale since 2004.

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