China's sovereign credit ratings could come under increased stress if policymakers resort to more aggressive stimulus measures that worsen financial risks, S&P Global Ratings said in a new report.
The rating agency said policymakers may be prompted to pursue a stronger and more immediate stimulus if China's growth decelerates faster than expected and leads to mounting employment losses or a sudden decline in investor confidence.
But an excessive policy reaction to near-term growth pressures could further weaken China's financial stability, which could be negative for its sovereign creditworthiness, S&P Global Ratings said.
"If credit expansion rebounds sharply from levels seen recently, this could hurt long-term financial stability. In that scenario, downward pressure on the sovereign ratings could intensify," said the debt watcher, which affirmed China's A+/A-1 sovereign credit ratings and stable outlook in September 2018.
China's real GDP expanded 6.2% year over year in the second quarter, the weakest rate of growth since 1992, as trade tensions weighed on the economy. The slowdown has led some analysts to predict that more stimulus from the government will be coming, although the People's Bank of China has repeatedly vowed not to resort to "flood-like stimulus."
S&P Global Ratings said the main risk to China's sovereign credit fundamentals would come from domestic factors and that the trade conflict with the U.S. "can be seen more as an unhelpful distraction for Chinese policymakers than a major hurdle to economic development."
"The deterioration in U.S.-China relations is unlikely to seriously impair China's economic development if structural reforms continue," the rating agency said.
