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DBRS cuts China's rating trend on apparent deleveraging pause

DBRS revised the trend on China's issuer ratings to negative from stable, citing growing downside risks as Beijing prioritizes meeting near-term economic expansion targets over reducing the pace of credit growth.

As part of the ratings action, DBRS confirmed China's long-term foreign- and local-currency issuer ratings at A (high), and its short-term foreign- and local-currency issuer ratings at R-1 (middle).

DBRS said China has made some deleveraging progress, but financial "vulnerabilities" remain high, creating the need for additional measures for curbing leverage.

"Authorities have become concerned about slowing domestic growth, combined with uncertainty from the on-going trade and investment tensions with the U.S., and deleveraging efforts appear to have paused," DBRS said. "China's debt is likely to rise again as monetary policy eases and disinflation risks return."

A continued leverage build-up may raise the risks of a decline in private sector demand and in financial stability, the rating agency warned.

China's gross debt jumped to 255% of GDP in the third quarter of 2018 from 140% in 2007, BIS estimates show, as the country depended on debt-fueled investment to boost growth following the global financial crisis.

China has lowered its economic growth target for 2019 to a range of 6% to 6.5% from a target of 6.5% growth in the past two years.

In 2018, China's GDP grew by 6.6% annually, exceeding the government's target of about 6.5% growth, but slowing from the 6.8% growth recorded in 2017.