S&P cut its outlook for China's sovereign credit rating on Thursday to negative from stable, but maintained the rating at AA-, saying the government's reform agenda is on track but likely to proceed more slowly than expected. The downgrade for China's outlook follows a similar move by ratings agency Moody's Investor Services in early March. At the same time, S&P also downgraded the outlook for Hong Kong, a special administrative zone of China, to negative, while reaffirming the Asian financial centre's AAA rating.
"Our outlook revision on Hong Kong reflects our similar action on the People's Republic of China...which reflected economic imbalances in China that are unlikely to diminish at the pace we previously expected," S&P said in a statement. In response to S&P's move, the Hong Kong government said that while it welcomed the rating agency's recognition of its credit strength and economic fundamentals, it disagreed with the assessment and revision of the credit outlook.
"We continue to believe that Hong Kong is in a good position to benefit from the structural rebalancing in the mainland economy from investment to consumption, as the increase in demand in services will create new business opportunities for a service-oriented economy like Hong Kong," it said in a statement. The news is unlikely to be welcomed by Chinese officials, many of whom have publicly criticised the Moody's downgrade as baseless.
Linus Yip, strategist at First Shanghai Securities Ltd in Hong Kong, said that investors need time to study the logic of S&P's downgrade to understand the implications. The yuan currency weakened slightly in offshore markets after the S&P news but later steadied. "This has been well flagged - a greater than expected slowdown and worries about very high levels of bad debt in the economy, especially with respect to loans to struggling industrial companies and property lending," said London-based Sanjiv Shah, CIO at Sun Global Investments.
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