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S&P Just Cut Its Outlook for China’s Credit Rating

Investors look at screens showing stock market movements at a securities company in Beijing in January 2016.FRED DUFOUR AFP/Getty Images

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 center’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.

The news is unlikely to be welcomed by Chinese officials, many of whom have publicly criticized the Moody’s downgrade as baseless.

Linus Yip, strategist at First Shanghai Securities 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.

“However, it should be noted that China’s rating is a high AA- and even if this eventually results in a downgrade, China is still likely to be an A+ credit, which is still much better than all emerging market peers and many middle income and developed countries.”

The Chinese government has grown increasingly active in trying to control the conversation over its economic outlook both at home and abroad, concerned that negative sentiment could encourage capital flight that would sabotage attempts to reinvigorate growth through investment.

Investors, both foreign and Chinese, have grown increasingly nervous as growth in the world’s second-largest economy has cooled to a 25-year low, raising questions about Beijing’s ability to deliver on promised reforms such as shedding bad debt and reducing industrial overcapacity without setting off a financial crisis or a spike in unemployment.

Chinese stock markets remain subdued after a bone-rattling crash in the summer of 2015 that only recently showed signs of bottoming out, and money flowed out of yuan-denominated assets at record rates as the currency slid against the dollar last year.