Standard & Poor’s cut China’s credit rating outlook from stable to negative out of concerns that China’s economic slowdown might last longer than expected. Bloomberg:
“We revised the outlook to reflect our expectation that the economic and financial risks to the Chinese government’s creditworthiness are gradually increasing,” S&P said in the statement. “This follows from our belief that, over the next five years, China will show modest progress in economic rebalancing and credit growth deceleration.”
China’s economic expansion will remain at or above 6 percent a year in the next three years, S&P forecast. The investment rate may be “well above” what S&P says are sustainable levels of 30-35 percent of GDP.
“In our opinion, these expected trends could weaken the Chinese economy’s resilience to shocks, limit the government’s policy options, and increase the likelihood of a sharper decline in trend growth rate,” it said.
Compared to some of the other analyses out there, S&P’s is actually rather bullish: many economists think China’s GDP is growing closer to 4% than to 6%. But even under this more optimistic prediction, China is still looking at five years of slower growth at a minimum. That’s bad news for Chinese citizens, but also for the billions of people living in commodities-rich countries around the world who had been banking on Chinese demand to help them climb the economic development ladder.
Another Bloomberg report estimates that Chinese companies have done $114 billion worth of overseas M&A deals just this year alone. That’s more than in all of 2014. It’s a demonstration of China’s growing international influence and a cause of concern for other companies and governments which worry about corruption and the power of Chinese state subsidies to outbid home-grown firms.
Yet however impressive China’s M&A buying power may be, this remarkable display also suggests that China isn’t such a great place to invest these days. China’s top firms didn’t get much bigger in the last year, and international investment opportunities didn’t get much better. The M&A binge looks an awful lot like capital flight, an effort by Chinese companies to diversify their holdings and limit their exposure to a slowing Chinese economy.
China’s banks reported their lowest profits in a decade, and the Asian Development Bank said on Wednesday that it expects Asia’s economy to see slower growth this year than it has since 2001. The ADB doesn’t predict things will improve much next year either.
The bottom line: This recent slowdown looks like it’s here to stay, and as China struggles, so will the many companies and governments which had been counting on its continued success.