China's Debt Rating Raised to A+ by Standard & Poor's

By Nipa Piboontanasawat

July 31 (Bloomberg) -- China's debt ratings were raised by Standard & Poor's as its foreign-exchange reserves surged and the economy withstood a U.S. slowdown.

China's long-term rating was raised one level to A+, the fifth-highest grade, putting the country on a par with Italy.

The world's fastest-growing major economy expanded by more than 10 percent for a 10th straight quarter in the three months through June and the currency reserves swelled to a record $1.8 trillion. An improved government balance sheet offers ``greater resilience'' in the event of a sharp economic downturn, the ratings company said in a statement.

``The upgrade is expected and China deserved it,'' said Frank Gong, head of China research at JPMorgan Chase & Co. in Hong Kong. ``China's external payment abilities have continued to improve and its economic growth is faster than other countries.''

China's first upgrade by the ratings company in two years ``reflects continuing improvements in the government's fiscal position, the country's strong external asset position and its exceptional economic growth potential,'' Standard & Poor's said. The strengths outweigh the possibility of bank loans turning soar in a slump, it said.

China's export growth has slowed this year as the U.S. economy falters.

The ratings outlook is stable, Standard & Poor's said. The short-term rating rose to A-1+, the highest level, from A-1. China's foreign debt stood at $392.6 billion at the end of March.

Inflation, Stability

Credit-default swaps linked to China's government debt fell 1.5 basis points to 54.5 basis points at 3:38 p.m. in Hong Kong, according to Barclays Capital's prices. That means it costs $54,500 a year to protect $10 million of China's debt from default for five years. The cost has fallen from 72 basis points at the end of June.

``The rating was raised probably because China has limited inflation and a stablized economy,'' said Shi Lei, an analyst at Bank of China Ltd. in Beijing. ``It won't impact the yuan's exchange rate in the short term as the central bank has shown its intention to slow down the yuan appreciation. But it will affect people's long-term expectation of yuan appreciation.''

China's currency has climbed 6.9 percent against the dollar this year.

Standard & Poor's raised Hong Kong's long-term rating to AA+, the second-highest level, from AA, putting the economy on a par with Belgium.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net