S&P warns of increasing risks in China

China's rust belt struggles with decline
China's rust belt struggles with decline

A second credit ratings agency has downgraded its outlook for China, warning of increased risk in its massive economy.

Standard & Poor's said Thursday that Beijing will make slower-than-expected progress in controlling credit growth and implementing vital economic reforms.

"The negative outlook reflects our view of gradually increasing economic and financial risks to the government's creditworthiness," S&P said in a report.

The change to a negative outlook means that S&P could downgrade China's credit rating this year or next. For now, S&P affirmed the country's current AA- credit rating.

The move follows an outlook cut earlier this month by Moody's, which pointed to worries about the government's potential debt burden and the huge sums of money flowing out of the country.

Related: Bad loans pile up at China's biggest banks

Chinese government debt is rising relative to the size of the economy, and policymakers are encouraging banks to dish out more loans to try to offset slowing growth.

But S&P said that Beijing should not flood its financial system with cheap credit -- which would boost GDP now, but increase debt over the long term.

"A downgrade could ensue if we see a higher likelihood that China will seek to stabilize growth at or above 6.5% by increasing credit at a significantly faster rate," it said.

-- Jethro Mullen contributed to this article.

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