S&P's upgrades China's credit rating to A-
(Agencies)
Updated: 2005-07-20 15:28

HONG KONG - Standard & Poor's upgraded China's sovereign credit rating Wednesday, saying the government has made significant progress in reforms to its shaky financial system and state-owned enterprises.

S&P raised China's long-term foreign-currency rating by one notch, to A- from BBB+. The new level is four notches above a non-investment grade, or "junk" status, and puts S&P closer in line with other agencies' more positive views of China.

The Moody's Investors Service rating of A2 is five rungs above junk status, and Fitch's A- rating is four steps higher.

Ping Chew, S&P's analyst for China, said the combination of China's recent strong economic growth with continued reforms of state-owned enterprises and the banking system had produced a "virtuous cycle," helping reduce the likelihood that the government will have to undertake expensive bailouts in the future.

"When you have better restructuring in the SOEs — they have for example retrenched many employees since 2003 — this allows them to be less of a burden on banks and the government. That in turn boosts the quality of banks' lending portfolio and allows the government more flexibility," Chew told reporters.

He pointed to the government's recapitalization of Industrial & Commercial Bank of China, the country's largest bank, as a major example of the progress in banking reforms.

Chew noted that China's banking sector remains one of the weakest in the world, and he warned that a sharp economic downturn could put a heavy burden on the government.

Nevertheless, he expressed confidence that China's policymakers will be able to manage the economic cycle well, and noted that S&P has a positive outlook on its rating for China, meaning that further upgrades are possible.

The rating upgrade was announced the same day as the Chinese government said the economy grew by a blistering 9.5 percent in the first half of the year, supported by capital investment and despite government efforts to ease breakneck growth.

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