U.S. ratings agency Standard & Poor's (S&P) has sliced its credit rating outlooks for China and Hong Kong from stable to negative on Thursday, citing increasing economic and financial risks to the mainland government's creditworthiness.
The move is a signal that the agency may lower China and Hong Kong's ratings from AA minus and AAA respectively in the next six months to two years.
In a statement announcing the decision, S&P forecast China's economic growth would remain at or above six percent annually over the next three years — marginally below the 6.5 percent growth targeted in China's latest five-year plan.
The agency said government and corporate leverage ratios in mainland China would likely deteriorate and the investment rate, at above 40 percent of gross domestic product, could well be unsustainable. This is as the Chinese government seeks to support the economy through credit-financed investment.
"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," S&P said in the statement.
The agency added that China's average income was lower than similarly rated countries and while the government and financial industry was less transparent with a more restricted flow of information.
"Given the huge opaqueness and quality of data issues is a mega problem," Timothy Ash, an emerging market analyst at Nomura, said in a note after the downgrade.
"Indeed, from that perspective, 'quality of data,' the rating likely should be lower in any event," he added.
S&P said the downgrade to the Special Administrative Region of Hong Kong reflected that of China.
"We do not believe that the credit standing of Hong Kong can be completely disconnected from that of the mainland, given financial and economic linkages, and the ultimate sovereign authority of China," it said.