The international ratings agency Standard and Poor's yesterday put China's sovereign debt ratings back where they were five years ago, saying the country's challenges have grown in sync with its capabilities.
S&P hiked the long-term and short-term foreign currency ratings one notch each, placing China on a level with Poland and Lativa.
"The banking system is much bigger than it was in the early 90s and liberalization ... makes the economy harder to control," said Paul Coughlin, managing director for S&P's Asia Pacific corporate and government ratings.
"Whilst China is in better shape [than in the early 1990s], there are also more and different challenges as well," Coughlin told a briefing in Beijing.
Broadly speaking, the agency's ratings reflect the risk foreign institutions shoulder when lending to China and the upgrade will make it cheaper for China to issue foreign-currency denominated bonds.
China briefly enjoyed a BBB+ ranking between 1997 and 1999, before being downgraded in the wake of the regional financial crisis.
Its short-term foreign currency rating was also raised yesterday by one notch to A-2, the pre-1999 level.
S&P said it saw considerable upside in the Chinese economy.
A broader revenue base combined with tax reform and improved management had relieved spending pressure on the government and provided room for further change, it said.
"Progress made in the past few years has made China's economy more market-oriented and less reliant on government spending to maintain GDP growth," said Ping Chew (周彬), S&P director of sovereign and public finance ratings.
The positive outlook also reflected S&P's expectation of an acceleration in the pace of economic reform, especially in terms of an improved financial system. A stronger banking system will improve monetary flexibility, as current policy tools aimed at heading off overly fast credit and money supply growth remain limited and blunt, it said.
At the same time, China's continued economic boom has raised government revenues to 19 percent of GDP compared with 13 percent in 1998.
"This revenue growth allows the government to pad the social safety net to cushion the fallout from further restructuring. It will also help to absorb bad debts from the banking system," Chew said.
However, S&P said it was also concerned about the high level of consolidated debt and the burden of contingent liabilities on the government. It would be hugely expensive for the government to assume the stock of bad debts in the financial system, the agency said.
Based on a non-performing loan recovery rate of 20 percent, the cost of recapitalizing the financial system could raise debt levels from an official 38 percent of GDP to more than 100 percent, the agency said.
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