An investor looks at a computer screen showing stock information at a brokerage house in Fuyang, China on January 28, 2016. S&P lowered China’s sovereign credit grade by one step to A-plus on Thursday.
S&P Global Ratings may have just done China's investors a favour.
With the credit assessor cutting the country's rating less than a month before the start of a twice-per-decade Communist Party congress, Chinese officials have even more motivation to keep financial markets buoyant. The power of the state's hand was seen after an equivalent downgrade by Moody's Investors Service in May: Knee-jerk losses in Chinese stocks evaporated in a single trading session, while the yuan soared to a seven-month high in offshore trading within a week amid suspected intervention.
"The impact on Chinese asset prices will probably be on the upside," said Ziyun Wang, a founding partner at hedge fund DeepBlue Global Investment Ltd. "Large state-backed funds will probably buy rather than sell Chinese bonds and stocks."
S&P lowered China's sovereign credit grade by one step to A-plus on Thursday in its first such reduction since 1999, citing the risks from a soaring debt burden. After the Moody's cut on May 24 – which China described as "absolutely groundless" – the Shanghai composite index clawed back a 1.3-per-cent drop to close higher, and rose 1.4 per cent the next day. The yuan posted its steepest weekly gain since July, 2016, as short-sellers in Hong Kong were squeezed by surging interbank rates.
"The news could read positively in China," said Qin Han, chief bond analyst at Guotai Junan Securities Co. in Shanghai. "Domestic investors may expect the government to release supportive policies to ease any disruption."
China's policy makers have stressed the need for stability in the lead-up to what will be the most important political event in years.
The China Securities Regulatory Commission has ordered local brokerages to mitigate risks and ensure stable markets before and during the Communist Party's twice-a-decade leadership congress next month, people familiar with the matter have said.
"Chinese fund managers are likely to sit tight on their positions," said Qiu Zhicheng, a Hong Kong-based strategist at ICBC International Research Ltd. If foreign investors sell shares in Hong Kong amid concern about the downgrade, "It would be a good opportunity to buy on the dip."