S&P Global Ratings may have just done China’s investors a favour. With the credit assessor cutting the nation’s rating less than a month before the start of a twice-a-decade Communist Party Congress, Chinese officials have even more motivation to keep financial markets stable. Policymakers sent directives instructing the nation’s financial regulators to be ready to take steps to ensure market stability after the downgrade, people familiar with the matter said.
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.
Chinese markets have displayed a similar resilience since S&P’s announcement on Thursday. The offshore yuan has gained about 0.2%, while yield spreads on Chinese corporate bonds have narrowed and a state-run lender completed the nation’s biggest sale of dollar-denominated debt since 2014. Stock markets in Shanghai and Shenzhen slipped on Friday, but finished the day well above their session lows.
“The impact on Chinese asset prices will probably be on the upside,” said Ziyun Wang, a founding partner at hedge fund DeepBlue Global Investment. “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+ 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% drop to close higher, and rose 1.4% 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.”
The offshore yuan traded at 6.5760 per dollar at 5:49pm local time, versus 6.5937 when the S&P downgrade was announced. The average spread on Chinese corporate dollar bonds fell 3.3 basis points to 266 on Thursday, the second largest drop since May 31, according to JPMorgan Chase & Co indexes. Postal Savings Bank of China Co raised $7.25bn from sale of so- called additional Tier 1 securities, pricing the deal just hours after S&P’s cut.
The Shanghai Composite slipped 0.2% on Friday, recovering from a 0.7% drop, while the large-cap CSI 300 Index finished unchanged. Hong Kong’s Hang Seng Index lost 0.8%. S&P stripped the city of its AAA rating on Friday, citing the its “strong institutional and political linkages” with China.
The directives from Chinese policy makers are aimed at ensuring market stability on Friday and during next week, rather than driving prices higher, said the people, who asked not to be named as the information is private. Markets being monitored include domestic stocks, government bonds both onshore and offshore, as well as the currency traded locally and overseas.
The People’s Bank of China and the China Securities Regulatory Commission didn’t immediately reply to faxed requests for comment.
If supporting markets was important for Chinese leaders in May, it’s even more critical now. Authorities have stressed the need for stability in the lead-up to what will be the most important political event in years. The twice-a-decade party congress, which starts on October 18, is expected to replace about half of China’s top leadership and shape President Xi Jinping’s influence into the next decade.
The CSRC has ordered local brokerages to mitigate risks and ensure stable markets before and during the event, people familiar with the matter have said. The CSRC has also banned brokerage bosses from taking holidays or leaving the country from October 11 until the congress ends, according to the people.
While the Moody’s cut initially jolted markets, S&P’s move is less surprising, according to Becky Liu, head of China macro strategy at Standard Chartered. It also comes after a period of strength in Chinese asset prices. 
The Shanghai Composite has climbed nearly 4% over the past two months, while the MSCI China Index of internationally-listed shares is up 10%. The offshore yuan has strengthened 2.7% against the dollar.
“Chinese fund managers are likely to sit tight on their positions,” said Qiu Zhicheng, a Hong Kong-based strategist at ICBC International Research. If foreign investors sell shares in Hong Kong amid concern about the downgrade, “It would be a good opportunity to buy on the dip.”


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